Cost Accounting Standards Board

Prepared for Congress by the 

Cost Accounting Standards Board Review Panel

April 2, 1999

Future Role of the
i

Summary

SUMMARY OF RECOMMENDATIONS

Congress asked the General Accounting Office (GAO) to establish a panel of experts

to study and make recommendations regarding the Cost Accounting Standards

(CAS) Board and the CAS system against the background of the far-reaching

procurement reforms of recent years. This group, the CAS Board Review Panel,

believes that there is a continuing need for the CAS and the CAS Board. Costbased contracts continue to represent the majority of all federal contracting dollars

and the original purposes of the CAS--principally, the need for uniformity and

consistency to protect the government from certain risks inherent in cost-based

contracts and to improve communications between the government and contractors

with regard to those contracts--remain.

While there continues to be a need for the CAS, the Panel believes reforms are

needed to encourage the participation of new commercial companies in government

procurement and to reduce the burden of government unique accounting

requirements on smaller companies. The Panel believes that a number of reforms

can reduce the burdens and costs of the CAS system without diminishing its

benefits. Implementing these reforms will help expand the government’s industrial

base and provide relief for smaller firms, with no significant reduction in the

amount of dollars subject to CAS coverage.

Changes to the Board’s Location and Membership. The Panel believes that

consideration of changes to the Board’s location, membership, and staffing is

warranted and will improve the Board’s effectiveness. In particular, the Board’s

placement in the Office of Federal Procurement Policy (OFPP) within the Office of

Management and Budget (OMB) has imposed limitations on the Board’s work and

raised questions regarding its independence. In considering an alternative, the

Panel believes that the Board should be an independent organization, although it

could be placed within a host agency, either the General Services Administration or

the Department of Defense (DOD), as long as the Board’s autonomy is ensured. In

terms of membership, the Panel recommends that the Board continue to have a

majority of government members; the Chair be a government officer; and that other

members include a representative of DOD (which continues to be responsible for

the majority of CAS-covered contracts), a representative of a civilian agency, an

industry representative, and a representative of the accounting profession (not a

government employee). The Panel believes that, given the Comptroller General’s

independence and particular interest in the CAS, there would be value in adding

the Comptroller General as a non-voting member.

Changes in CAS Applicability. The Panel recognizes that increases to the

applicability thresholds as well as the creation of new exemptions to CAS coverage

are controversial areas. Accordingly, the Panel searched for ways to reduce the

costs of the CAS system while maintaining its benefits for those contractors with a

significant pricing risk to the government. Based on its analysis of the numbers of
ii

Summary

contractors and percentages of dollars that would be affected, the Panel concludes that the current

$500,000 contract application threshold should be retained, but that the OFPP Act of 1988 should be

amended so that the applicability of the CAS to non-exempt contracts would be triggered only by

receipt of a contract of $7.5 million or more. According to the Panel’s analysis, if this change is

implemented, about 97 percent of CAS-covered dollars will continue to be subject to the CAS, but the

number of contractor segments subject to CAS coverage will significantly decrease. The Panel also

recommends that the threshold for full CAS coverage be increased from $25 million to $50 million.

In addition, the Panel recommends that firm fixed-price contracts be exempt from the CAS in those

cases where the government does not obtain certified cost or pricing data at the time of award. The

Panel reached this conclusion because when certified cost or pricing data is not obtained, the

safeguards provided by the CAS are not necessary.

Transfer of Administrative Responsibilities to Contracting Agencies. The Panel recommends that

Congress provide contracting agencies with responsibility for contract administration related to the

CAS, such as the authority to waive CAS requirements. Consistent with recent procurement reforms,

which have vested more discretion in contracting agencies in such contract administration matters,

the granting of waivers by the concerned agencies would be more efficient and expeditious, and

would allow the CAS Board to focus on maintaining a system of cost accounting requirements.

Review of Standards. The Panel believes that an overall review of the CAS and their attendant

requirements is warranted to judge whether the standards should be streamlined. In that review,

consideration should be given to the experience gained in the twenty years since the standards

were initially promulgated; the contentions that procurement policy and funding concerns have

inappropriately shaped the standards; the areas in which the CAS and generally accepted

accounting principles overlap and differ; and the possibility that the disclosure statement may be

unnecessarily burdensome. The Panel also concludes that there is no longer a continuing need to

include CAS 405 (accounting for unallowable costs) and CAS 406 (cost accounting period) in the

definition of modified coverage in light of other applicable requirements.
iii

Contents

Summary of Recommendations .................................................................................... i

Chapter 1 Introduction ............................................................... 1

Background ................................................................ 1

Early cost allocation rules......................................... 3

Events leading to the development of the CAS........ 4

Establishment and history of the CAS Board .......... 6

Recent acquisition reforms ....................................... 8

Chapter 2 The CAS and Other Cost Rules .............................. 12

The CAS ................................................................... 12

Other cost rules ....................................................... 15

Audit oversight ........................................................ 17

Chapter 3 CAS Applicability .................................................... 19

Benefits and costs of the CAS ................................. 19

CAS applicability and coverage thresholds............ 25

Firm fixed-price contracts ....................................... 31

Conclusion................................................................ 33

Recommendations ................................................... 34

Chapter 4 The CAS Board’s Operations and

Review of the Standards ......................................... 35

Accounting rules versus contract administration .. 35

Review of the standards .......................................... 40

Conclusion................................................................ 44

Recommendations ................................................... 44

Chapter 5 Need for and Organization of the CAS Board ........ 46

Continued need for a CAS Board ............................ 46

Organization of the CAS Board .............................. 47

Recommended changes............................................ 54
iv

Appendix I The CAS Board Review Panel list of Panel Members...................... 57

Appendix II Potential benefits of CAS as identified by the Comptroller

General in 1970 ................................................................................. 59

Appendix III The CAS ............................................................................................. 61

Appendix IV The CAS exemptions ......................................................................... 63

Appendix V The CAS applicability and coverage diagram .................................. 64

Appendix VI Sample disclosure statement form ................................................... 65

Appendix VII Comparison of the CAS and FAR cost principles ........................... 106

Appendix VIII List of surveyed contractors and IDCC firms ................................ 116

Appendix IX Testimonies and other statements ................................................. 119

Appendix X Methodology used to identify the

CAS-covered contracts..................................................................... 354

Appendix XI Full versus modified coverage risks ............................................... 362

Appendix XII Analysis of the CAS Board waiver requests................................... 364

Appendix XIII Comparison of the CAS and GAAP................................................. 367

Appendix XIV DOD’s cost-based contracting ......................................................... 370

Appendix XV Summary information on selected boards...................................... 371

Contents

Appendices
v

Table

Table 5.1 Structure of original and current CAS Boards ................. 47

Figures

Figure 3.1 Comparing current CAS coverage with alternative

trigger contract amounts and a full coverage

threshold of $50 million ..................................................... 29

Figure 3.2 Type of subcontracts used by selected DOD

contractors on cost-based government contracts .............. 33

Abbreviations

ABC Activity Based Costing

AICPA American Institute of Certified Public Accountants

ASBCA Armed Services Board of Contract Appeals

ASPR Armed Services Procurement Regulation

B&P Bid and Proposal

CAS Cost Accounting Standards

CBO Congressional Budget Office

CPA Certified Public Accountant

DCAA Defense Contract Audit Agency

DCMC Defense Contract Management Command

DOD Department of Defense

DOE Department of Energy

IDCC Integrated Dual-use Commercial Companies

FACA Federal Advisory Committee Act

FAR Federal Acquisition Regulation

FASA Federal Acquisition Streamlining Act

FASB Financial Accounting Standard Board

FERC Federal Energy Regulatory Commission

FIFO First-in, First-out

FPDS Federal Procurement Data System

G&A General and Administrative Expense

GAAP Generally Accepted Accounting Principles

GAO General Accounting Office

GSA General Services Administration

ICC Interstate Commerce Commission

IR&D Independent research and development

JDAMS Joint Direct Attack Munitions System

JPATS Joint Primary Aircraft Training System

LIFO Last-in, First-out

NASA National Aeronautics and Space Administration

OFPP Office of Federal Procurement Policy

OPM Office of Personnel Management

OMB Office of Management and Budget

Contents
vi

Abbreviations

RAPB Railroad Accounting Principles Board

STB Surface Transportation Board

TD Treasury Decision

TINA Truth in Negotiations Act

Contents
1

INTRODUCTION

BACKGROUND

Since the early part of the century, the federal government has had accounting

requirements or criteria designed to protect it from the risk of overpaying for

goods and services by governing the manner or degree to which contractors

apportion costs to their cost-based contracts with the government. A key role in

the current rules is played by the 19 standards that were developed in the 1970s

by the Cost Accounting Standards (CAS) Board, a body created by Congress for

the purpose of developing a set of uniform and consistent standards. The 19

standards and their attendant regulations impose unique and significant

accounting requirements on companies that are awarded cost-based contracts by

the government.

In recent years, the dominant trend in government contracting has moved

toward simplifying the government’s acquisition process and eliminating

government-unique requirements. While the CAS system has largely remained

untouched by these reforms, there have been calls to adjust the standards or

exempt more contracts from the burden of compliance with them. The wisdom

of doing so turns largely on cost/benefit analyses weighing the benefits of the

CAS system against its costs, as well as on judgments about the level of risk

the government should tolerate in possible accounting, pricing, and costing

techniques that may result in overpayments by the government.

Congress asked that the General Accounting Office (GAO) establish a panel of

experts to study issues concerning the CAS system and make recommendations

to Congress. Noting that the contracting environment in the federal

procurement system has significantly changed since the establishment of the

original CAS Board more than 25 years ago, Congress asked that the CAS

Board Review Panel focus on such things as the:

· viability of the CAS Board’s original mission after major changes in the

procurement laws;

· extent to which a board is advisable to regulate contractor cost accounting

practices;

· extent to which the cost allocability functions of such a board should be

combined with functions related to determinations of cost allowability;

Chapter 1
2

· composition, membership, and structure of such a board to ensure its

independence and balance; and

· provision of adequate staff and resources for such a board.

Congress directed that the Panel consist of members from the government’s

procurement/acquisition offices, private industry, and the private accounting profession

(but not CAS Board members or staff). Congress further directed that the Panel’s

activities should “include opportunities for substantial participation and analysis by

industry and the private accounting profession, as well as government representatives.”

In accordance with this direction, GAO created a Panel of 10 members with extensive

knowledge of accounting and finance and proven track records of concern for the public

interest in matters related to the CAS.1 Five were from the government, four from

private industry, and one from the private accounting profession.

In considering the various issues that Congress raised, the Panel received an

enormous amount of information and advice from government representatives,

industry, and the private accounting profession. For example, as part of the data

gathering process for this report, the Panel held public hearings on June 16-18, 1998,

at which more than 25 officials from government and industry presented views

about the future role of the CAS Board and the standards themselves. The Panel

also met with the current members of the CAS Board.

The Panel’s work was supported by staff working groups formed under GAO’s

sponsorship to provide support to the Panel members as well as administrative

support to the study. The working groups consisted of staff from GAO, other

government agencies (Department of Defense (DOD), National Aeronautics and

Space Administration (NASA), and Office of Personnel Management (OPM)), the

legal and public accounting community, and industry. The members of these working

groups brought substantial expertise on issues relating to contract administration,

government requirements, and industry compliance with the CAS requirements.

To review the past and current role of the CAS Board, the working groups researched

the events leading to the creation of the standards and the CAS Board as well as the

events leading to more recent changes in acquisition laws. The Defense Contract Audit

Agency (DCAA) and the Defense Contract Management Command (DCMC) presented

data to evaluate contracts to which the CAS apply and analyze potential changes in the

CAS thresholds. In addition, to learn about the costs and benefits of the CAS and how

contractors manage the CAS requirements, a group of primarily commercial companies

and the major DOD contractors was surveyed, and the testimony of government and

1

See appendix I for a list of Panel members.
3

industry representatives was considered. GAO staff reviewed internal Board

documentation and held meetings with the Executive Secretary and other Board

staff to analyze recent CAS Board promulgations. A draft report was developed

that was then fully reviewed by the Panel members, who brought to bear their

individual expertise.

The Panel found a continuing need for the CAS and CAS Board, but it concluded

that some changes are appropriate. This report is the result of this extensive

effort and presents the Panel’s unanimous conclusions and recommendations.

The following sections of this chapter trace the early history of cost allocation

rules and the events that led to the development and adoption of the present-day

CAS Board. The chapter closes with a summary of some of the more relevant

aspects of the recent reforms that have been implemented in the federal

procurement process.

EARLY COST ALLOCATION RULES

The federal government has often used contracts in which the price is based upon

the contractor’s cost of performing (cost-based contracts),2 and the government has

recognized the need to protect itself from being mischarged by defining the costs

that can be recovered under the contracts (“allowability”) and establishing some

rules for the allocation of indirect costs to the contracts. As early as 1916, the

Munitions Manufacturers Tax legislation specified which costs could be recognized

when determining profits on government contracts for purposes of determining a

tax on munitions contractors’ profits.3 Government contracting officers began

referring to this legislation to determine which costs would be reimbursed on

federal cost-type contracts.

Beginning in 1934, the Department of Treasury issued rules (culminating in

Treasury Decision [T.D.] 5000) that were followed by government contracting

officers. T.D. 5000 defined various types of costs and identified certain ones as

unallowable, and provided principles for allocating indirect costs to federal

contracts. In 1942, the War and Navy Departments jointly published a set of cost

principles, dubbed the “Green Book,” which were also widely used by contracting

officers. The Green Book took a cost-by-cost approach to the apportionment of cost

categories. For example, the Green Book provided that shop engineering expenses

could be allocated by job or project and calculated as percentages of direct labor or

production costs.

2Throughout this report, references to cost-based contracts include all cost-type contracts as well as those fixed-priced contracts where the

contractor’s estimated or actual costs play a role in determining the amount the government pays.

338 Stat. 781 (1916).
4

In 1949, the Armed Services Procurement Regulation (ASPR) superseded the

Green Book and T.D. 5000 for DOD contracts. The ASPR addressed the

allowability of various costs and stated general principles regarding how costs

should be allocated. In 1959, the ASPR was amended to introduce more detailed

and specific allocation rules, although contractors were still allowed broad

latitude in measuring, assigning, and allocating costs. These rules were

essentially the same as those contained in the Federal Acquisition Regulation

(FAR) today.

While not a cost allocation rule, a significant statute relevant to contractor costs

is the Truth in Negotiations Act (TINA).4 TINA was first enacted in 1962 after

congressional studies found cases of overpricing in negotiated DOD contracts

because of inflated or erroneous cost estimates. TINA was intended to protect the

government from the risk of overpayment by placing the government on equal

footing with contractors in negotiating contract prices and giving the government

the right to seek contract price adjustments if contractors breach their duties

under TINA.

EVENTS LEADING TO THE DEVELOPMENT OF THE CAS

In 1968, during Congress’s consideration of whether the Defense Production Act

of 1950 should be extended, Admiral Hyman G. Rickover testified that it was

nearly impossible to ascertain the profit on a particular contract because of the

lack of control over the definitions and the shifting treatment of contract costs.

He proposed that Congress provide for the development of uniform accounting

standards for defense contracts so that these costs could be measured and

controlled.

As a result, the House Banking and Currency Committee conducted hearings to

determine whether a uniform set of cost accounting principles should be

developed. At the time, negotiated cost-based contracts represented the

overwhelming majority of all military procurements on a dollar-value basis, and

various witnesses testified that uniform cost accounting rules were necessary

because the lack of such standards substantially increased costs of procurement

and difficulties in contract administration. Witnesses testified that without such

standards it was difficult for the government to compare competing companies’

contract price estimates because various contractors might use different

accounting methods to measure and allocate costs. Moreover, witnesses reported

that once contracts had been awarded, carrying out accurate audits was difficult

because contractors sometimes presented costs in their proposals differently from

the way they charged the government during contract performance. It was also

argued that the various existing laws that were intended to control contractor

4The provisions of TINA are discussed in chapter 2.
5

costs and excess profits (including the Renegotiation Act of 19515 and TINA) were

not sufficient to protect the government’s interests.

Other witnesses disagreed with both the need for, and workability of, uniform cost

accounting rules. These witnesses argued that uniform standards were unnecessary

because federal regulations governing cost allocation (that is, the ASPR) and the

Generally Accepted Accounting Principles (GAAP) already contained the necessary

cost accounting guidelines. Such standards, they also argued, would unnecessarily

interfere with commercial accounting practices.

The House Banking and Currency Committee report issued after the hearings

concluded that the absence of uniform cost accounting rules was substantially

increasing procurement costs and that there were inadequate safeguards against

excess profits.6

 However, Congress did not then require the development of

uniform standards but directed GAO to undertake a study on the feasibility of

establishing such standards.7

After a year of study, the Comptroller General reported that uniform and

consistent standards were feasible and recommended that such standards be

developed.8 In its report, GAO reported a number of cases of cost misallocation,

including cases in which contractors: (1) used one set of generally accepted

accounting methods to estimate contract costs and a different set to record actual

performance costs; (2) double-counted a cost, once as direct and again as indirect;

(3) hid unallowable direct charges in overhead rates; (4) included costs that were

exclusively or mostly related to commercial operations in general overhead pools

and charged part of these to government contracts; (5) recovered cost overruns on

independent research and development by charging the costs under another name;

(6) treated capital outlays as current expenditures and charged the entire amount

to the government; or (7) failed to credit the government for refunds and discounts

they received from subcontractors and suppliers.

The GAO report identified several potential benefits of uniform and consistent

standards. The study noted that such standards could (1) facilitate the

preparation and reporting of cost information by contractors and its audit and

evaluation by the government; (2) provide guidance to ensure that costs would be

reported on a consistent basis and be comparable with those proposed, projected,

or otherwise reported; (3) improve communications among the government,

Congress, industry, and the public; (4) promote a common understanding of the

methods of cost determination and minimize controversy in the administration

5

65 Stat. 7 (1951).

6

House Report No. 1455, May 23, 1968.

7

82 Stat. 279 (1968).

8

Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense Contracts by the Comptroller General

of the United States, January 1970.
6

and settlement of contract disputes; and (5) eliminate differences within the

government regarding acceptable accounting practices.9

The GAO report did not discuss the potential costs associated with the

implementation of standards. Although neither the benefits nor the costs of

implementing standards were quantified, the study concluded that for a variety

of reasons the “cumulative benefits from the establishment of cost accounting

standards should outweigh the cost of implementation.”

In 1970, when the extension of the Defense Production Act was again under

consideration, the Senate Banking and Currency Committee was presented with

the GAO report. The committee report on the Defense Production Act concluded

that accurate measurement of contractors’ costs was needed in negotiated

contracts both during price negotiations and during contract performance and

noted that financial accounting standards (e.g., GAAP) could not satisfy the

government’s requirements because “unlike financial accounting, which

concentrates on a company’s total operations for a given period, cost accounting is

concerned with allocating a part of a company’s total expenses to a specific

product or service.”10 According to the committee, the essential problem was that

contractors could, to a significant degree, control their reported costs on

negotiated contracts simply by picking and choosing the accounting methods

most advantageous to them.

ESTABLISHMENT AND HISTORY OF THE CAS BOARD

Against this background, Congress in 1970 created the CAS Board as an

independent board located within the legislative branch.11 The Board was

chaired by the Comptroller General, who appointed four other members. The

Board was authorized to promulgate standards designed to achieve uniformity

and consistency in cost accounting practices used by federal contractors on

national defense contracts in excess of $100,000.

By the end of the decade, the Board had issued 19 standards that stated

principles for the measurement, assignment, and allocation of a variety of cost

subjects.12 During that period, the Board also issued various amendments and

interpretations to its standards. The Board exempted some classes of contracts

from CAS coverage (for example, contracts with small businesses) and established

procedures for waiving the CAS for particular contracts. Two of the more

significant actions by the Board were the establishment of a trigger contract and

9See appendix II for a complete list of benefits projected in the GAO report.

10Senate Report No. 91-890, May 21, 1970. See also House Report No. 91-1330, July 27, 1970.

11P.L. 91-379, August 15, 1970, 84 Stat. 796 (1970). Funds were first appropriated for the Board’s operation in the 1971 Supplemental Appropriation Act, 84 Stat. 1991 (1971).

12The CAS system is discussed in chapter 2.
7

the use of two tiers of CAS coverage, full and modified. Under the trigger contract

approach, a contractor segment was not subject to CAS coverage until that segment

received a non-exempt contract in excess of $500,000. After that, all non-exempt

contracts received by that segment in excess of $100,000 were CAS-covered. Once

a segment had a CAS-covered contract, the two tiers of CAS coverage determined

whether that contract was subject to modified coverage (compliance with CAS 401

and CAS 402) or full coverage (compliance with all standards). Full coverage was

applicable to non-exempt contracts when total contract awards for a contractor

segment exceeded a certain dollar threshold; modified coverage applied when total

contract awards did not exceed that threshold.

In 1980, Congress considered the CAS Board’s task essentially complete and did

not renew its funding.13 Because it did not receive a fiscal year 1981

appropriation, the CAS Board ceased its operations. Congress, however, did not

repeal the law that created the Board, and the standards remained in effect.

In the absence of the Board, DOD took responsibility for maintaining the standards

and their accompanying rules and regulations during the 1980s. DOD believed that

future revisions to the CAS could be introduced through the normal procedures for

revising procurement regulations and that there would be no need for a CAS Board.

Industry was strongly opposed to DOD taking over the CAS Board’s functions, and

several government agencies—NASA, the General Services Administration (GSA),

and GAO—also challenged DOD’s authority to revise the CAS.

Between 1980 and 1988, disputes emerged over the interpretation of 9 of the 19

standards. For example, shortly after the CAS Board ceased operations, DOD

determined that the standard addressing depreciation of tangible capital assets

(CAS 409) ran counter to its procurement policies aimed at promoting higher

contractor productivity. To avoid that conflict, DOD interpreted and later proposed

to amend that standard to provide the flexibility to reach advance agreements

with contractors on shorter depreciation periods, allow more rapid capital

equipment depreciation, and recognize replacement costs as the basis for

depreciation. GAO opposed DOD’s proposal to amend this standard and took the

position that CAS 409 should not be a vehicle for defense contractors to stimulate

cash flow and returns on investment. GAO argued that CAS 409 was based on the

most appropriate cost accounting practices, whereas the DOD initiative was “an

arbitrary measure which has been devised for other than cost accounting

purposes.”14 Later, DOD essentially abandoned its position.

The disputes regarding the various standards caused increasing numbers of

government and industry representatives to conclude that the standards needed to

13In November 1980, the Comptroller General issued a report, Cumulative Progress Report to the Congress, 1971-1980, which indicated that

the Board had substantially completed its assigned task of promulgating the CAS.

14GAO also warned that this DOD initiative could cost as much as $2.4 billion.
8

be reviewed and possibly amended. There were also suggestions that the CAS

thresholds might be obsolete and questions as to how the CAS requirements could

be waived in the absence of a CAS Board. These were among the factors that drew

attention to the need to reestablish an independent board to administer the CAS.

In 1988, in the Office of Federal Procurement Policy (OFPP) Act,15 Congress

reestablished the CAS Board. The new Board was placed in OFPP, which is part

of the Office of Management and Budget (OMB). The reestablished Board was

given broader authority than its predecessor. For example, the CAS now apply by

law to all federal contracts, not just defense contracts. The Board was also given

“exclusive” authority to make, promulgate, amend, and rescind the CAS, and the

OFPP Administrator was charged with ensuring that no agency regulations were

inconsistent with the CAS.

RECENT ACQUISITION REFORMS

A recurring goal of recent statutory and regulatory changes in the government’s

purchasing processes has been to adopt practices more like those of the

commercial marketplace and to increase the availability of commercial products

to meet government needs. These acquisition reforms also vested more discretion

in contracting agencies to allow them to better exercise their business judgment

in making contracting decisions. It was believed that the implementation of

these procurement reform initiatives would result in substantial cost savings.

In the National Defense Authorization Act of 1991, Congress declared that the

time had come to start the process of streamlining the hundreds of individual

federal laws that formed the underpinnings of the defense acquisition system.16

To that end, Congress directed DOD to establish a panel of experts (known as the

Section 800 Panel) to study acquisition laws and to make specific

recommendations for streamlining them.

The Section 800 Panel was particularly concerned that government-unique

requirements, such as the CAS, were among the reasons why many contractors

chose to separate their government and commercial production facilities. The

Panel’s report stated that these barriers to civilian-military integration not only

added to the costs of doing business with the government, but also “walled off” the

rapid advances being made in commercial research and development from easy

exploitation and use in military systems.17

The Section 800 Panel recommended that the CAS be retained but urged the CAS

Board to take prompt action to facilitate purchases of commercial items and services.

15P.L. 100-679, 102 Stat. 4059 (1988), codified at 41 U.S.C. 422.

16P.L. 104 Stat. 1587 (1990).

17Final Report of the Acquisition Law Advisory Panel, January 1993.
9

The Panel believed that, even without new laws, the Board had the authority to

exempt classes of contractors and subcontractors and types of contracts and

subcontracts from the CAS. The Panel stated that, “as a priority matter,” the CAS

Board should use its existing authority “to exempt contracts for commercial items or

at least limit the standards that would be applicable to government contracts for

commercial items.” The Panel believed that prompt action would be “among the most

important steps” that could be taken to facilitate the government’s purchase of

commercial items and services and to allow contractors offering commercial products

to the government “to be able to integrate defense and commercial production where

economically feasible without being subject to restrictive cost accounting standards.”

The Panel also stated that the implementation of this recommendation would “result

in cost savings by allowing businesses to consolidate the production of commercial and

defense related products in a single business unit without altering existing accounting

or management practices.”

Congress adopted many of the recommendations of the Section 800 Panel in the

Federal Acquisition Streamlining Act of 1994 (FASA),18 which contained sweeping

statutory procurement reforms. FASA contained more than 200 sections, changing

the laws that govern how federal agencies annually acquire almost $200 billion in

goods and services. The major issues covered by FASA include buying commercial

items, using commercial practices, reducing administrative operating costs by

eliminating burdensome paperwork, increasing the importance of past performance

in selecting contractors, empowering contracting officers to exercise business

judgment, and streamlining the entire acquisition process.

FASA established preferences for purchasing commercial end items and

components. It also required agencies, to the maximum extent practicable, to

specify their needs in terms of functions to be performed, performance required, or

essential characteristics; define requirements to allow commercial items to

compete; and conduct market research to find commercial products that can meet

their needs. FASA also expanded the range of products and services that qualify

as commercial items and exempted commercial items from various procurement

laws. In FASA, Congress implemented the Section 800 recommendation regarding

the CAS, by exempting from the CAS “any other firm-fixed price contract or

subcontract (without cost incentives) for commercial items.” In 1996, Congress

enacted the Clinger-Cohen Act of 1996,19 to provide further acquisition reform. As

part of the Clinger-Cohen Act, Congress amended the OFPP Act to expressly

exempt contracts for commercial items from the CAS requirements.

The changes implemented in FASA and the Clinger-Cohen Act were intended to

make the government’s acquisition policies for procuring commercial items more

similar to those of the private sector. For example, FASA provided that no

18P.L. 103-355, 108 Stat. 3243 (1994).

19P.L. 104-106, 110 Stat. 656 (1996).
10

certified cost or pricing data should be required from a contractor for commercial

items sold to the government so long as there was adequate price competition.

FASA further provided that even without adequate price competition, the agency

should attempt to determine price reasonableness without requiring the

submission of certified cost or pricing data. Also, the Clinger-Cohen Act removed

the requirement that commercial items be sold at “established catalog or market

prices” and “in substantial quantities to the public” in order to be exempt from the

requirement to submit certified cost or pricing data.

The procurement reform initiatives in FASA and the Clinger-Cohen Act

authorized and encouraged the exercise of discretion and business judgment by

contracting officials. For example, the provision in FASA authorizing the use of

simplified acquisition procedures for procurements under $100,000 in value was

intended to grant agencies greater discretion when making smaller dollar

purchases. Another area where FASA granted increased discretion to contracting

agencies was in task and delivery order contracts, where agencies were given

broad discretion in establishing procedures for the evaluation and award of

individual task orders. Moreover, the commercial item acquisition procedures

envisioned that contracting officials would have far more flexibility in exercising

their business judgment. Finally, Congress authorized various pilot programs

that granted DOD discretion to use innovative acquisition procedures—for

example, the Joint Direct Attack Munitions System (JDAMS) and the Joint

Primary Aircraft Training System (JPATS).

Congress expected this procurement reform legislation to “enable the government

to buy goods and services cheaper and faster.”20 The Senate Committee on

Governmental Affairs and the Senate Committee on Armed Services, in their

reports on FASA, incorporated the views of the Congressional Budget Office (CBO),

which stated that FASA would likely reduce the cost that the federal government

would incur for goods and services, allowing agencies to make more efficient use of

their appropriated funds.21 The CBO stated that savings could be achieved by

adjusting “policies that require government contractors to supply data that they do

not have to collect or provide in ordinary business dealings” by facilitating the

purchase of commercial items and by granting agencies greater discretion when

making small dollar purchases. The CBO also stated that “there is good reason to

expect that [FASA, which] makes accounting simpler, government-specific products

less prevalent, and procurement more efficient[,] would yield budgetary savings.”

While there is no consensus on how many billions of dollars in savings have been

already realized by the various procurement reform initiatives, there is no doubt

20Senate Report No. 103-259, May 12, 1994.

21Senate Report No. 103-258, May 11,1994; Senate Report No. 103-259, May 12,1994.
11

that considerable savings have occurred.22 The JDAMS and JPATS programs have

both been reported as acquisition reform success stories that have achieved

significant cost savings; for example, DOD states that the JPATS acquisition

strategy resulted in original program estimates of $7 billion being reduced to

about $4 billion upon contract award.

In sum, there has been considerable acquisition reform in recent years to

streamline the procurement process and increase the discretion of contracting

agencies in making their acquisition decisions. While these reforms have allowed

considerable cost savings to be achieved, opportunities for additional savings exist.

In the following chapters, the Panel discusses the various government cost rules,

the benefits and costs of the CAS, proposed modifications to the existing CAS

applicability thresholds, proposed modifications to the CAS Board administrative

functions, a proposed review of the existing standards, and proposed restructuring

and relocation of the CAS Board.

22See, for example, Acquisition Reform: Effect on Weapon System Funding (GAO/NSIAD-98-31, Oct. 1997).
12

THE CAS AND OTHER COST RULES

To reduce the risk of the government being overcharged, as well as for other

reasons, government contractors are subject to a variety of statutes and

regulations governing the allowance, allocation, and negotiation of costs for

federal contracts. The cost review and control systems established by these

statutes and regulations include the CAS, the FAR cost principles, and TINA. To

ensure compliance with these rules, contractors are required to make available

for audit their books, records, accounting procedures and practices, and other

data. In this chapter, the Panel briefly describes each of these sets of cost rules

and discusses the audit oversight available to ensure compliance with them.

THE CAS

As part of efforts to protect the government from the adverse effects of

inconsistent or inaccurate contractor cost accounting, including overpayment, the

CAS Board was established more than 25 years ago to achieve greater uniformity

and consistency in cost accounting practices used by certain federal contractors.

The primary task of the CAS Board is to promulgate and revise standards to

achieve (1) an increased degree of uniformity in cost accounting practices among

government contractors, and (2) consistency in cost accounting practices by

individual government contractors over periods of time.

A CAS is a statement formally issued by the Board with regard to the

measurement, assignment, and allocation of costs that enunciates a principle or

principles to be followed, establishes practices to be applied, or specifies criteria

to be employed in selecting from alternative principles and practices in

estimating, accumulating, and reporting costs under contracts subject to the rules

of the Board. The standards may be stated in terms as general or as specific as

the Board considers necessary to accomplish its purpose, and the existing

standards are generally not written in such detail as to precisely prescribe

methods of accounting for every kind of cost under all the variety of

circumstances involved in government contracting. There are currently 19

standards that can be broadly categorized into three groups: (1) standards

dealing with overall cost accounting matters; (2) standards dealing with classes,

categories, and elements of cost; and (3) standards dealing with pools of indirect

costs.23

CAS Applicability

In the absence of a specific exemption or waiver, the CAS must be used by all

executive agencies and by contractors and subcontractors when estimating,

accumulating, and reporting costs in connection with the pricing and

Chapter 2

23The 19 standards are described in further detail in appendix III.
13

administration of, and settlement of disputes concerning, all negotiated contracts

and subcontracts in excess of $500,000.24 There are a number of statutory and

regulatory exemptions to the CAS requirements. Congress has provided by statute

that the CAS requirements do not apply to contracts and subcontracts for the

acquisition of commercial items and contracts and subcontracts where the price

negotiated is based on prices set by law or regulation. In addition, the CAS Board

has broad authority to exempt classes or categories of contracts and subcontracts or

contractors and subcontractors from CAS coverage. Under this authority, the CAS

Board has promulgated a number of other exemptions from the CAS requirements,

including contracts and subcontracts with small businesses as well as firm fixedprice contracts and subcontracts awarded without the submission of any cost data.25

There is also a mechanism for the CAS Board to grant waivers for individual

contracts or subcontracts.26

CAS Coverage

In 1977, the CAS Board established two levels of compliance—full and modified

coverage.27 Full coverage requires that a business unit28 comply with all existing

standards at the time of contract award. Currently, full coverage applies to a

business unit that receives a single CAS-covered contract of $25 million or more,

or received $25 million or more in total CAS contracts during the preceding cost

accounting period—if at least one of those contracts exceeded $1 million.29 Once a

business unit receives an award subject to full coverage, all of the unit’s

subsequent non-exempt contracts are also subject to full coverage.

Modified coverage currently requires a business unit to comply only with CAS 401

(consistency in estimating, accumulating, and reporting costs), CAS 402

(consistency in allocating costs incurred for the same purpose), CAS 405

(accounting for unallowable costs), and CAS 406 (cost accounting period).30

Business units that receive CAS-covered contracts, which do not exceed the

threshold for full coverage, are subject only to modified coverage. That is, the

business units subject to modified coverage include those that received a nonexempt contract of more than $500,000 but did not receive a single CAS-covered

contract in excess of $25 million in the current cost accounting period and either

24Unlike the FAR cost principles and TINA, the CAS generally do not apply to the pricing and costing of modifications of contracts not

initially subject to CAS coverage.

25See appendix IV for a list of all the CAS exemptions.

26The waiver process is discussed in detail in chapter 4.

27See appendix V for a CAS applicability and coverage diagram.

28A “business unit” is defined as “any segment of an organization, or an entire business organization which is not divided into segments.”

A “segment” is defined to be “one of two or more divisions, product departments, plants, or other subdivisions of an organization

reporting directly to a home office.” 48 C.F.R. 9904.410-30(a)(2), (7).

29A “CAS-covered contract” is defined as any negotiated contract or subcontract in which a CAS clause is required to be included, that is,

non-exempt contracts or subcontracts of $500,000 or more. 48 C.F.R. 9903.301(a).

30Until 1993, modified coverage only required a business unit to comply with CAS 401 and CAS 402.
14

(1) received less than $25 million in net CAS-covered awards31 in the immediately

preceding cost accounting period or (2) received more than $25 million in net

CAS-covered awards in the immediately preceding cost accounting period, but no

single award in excess of $1 million. Contracts awarded subject to modified

coverage remain so throughout the contract life, regardless of changes in the

business unit’s CAS status in subsequent cost accounting periods. Once a

business unit receives an award subject to modified coverage, all CAS-covered

contracts awarded to the business unit during that cost accounting period are also

subject to modified coverage unless a contract is awarded that triggers full

coverage, which then results in the business unit’s subsequent CAS-covered

contracts being subject to full coverage.

CAS Disclosure Statements

Certain CAS-covered contractors (that is, contractors that have received contracts

or subcontracts that are subject to the CAS) are required to disclose their cost

accounting practices in writing. The CAS Board has designed a disclosure

statement for this purpose. Generally, a disclosure statement must be filed by (1)

any business unit receiving a CAS-covered contract or subcontract of $25 million

or more or (2) any company which, together with its segments, received net CAScovered awards totaling more than $25 million in its most recent cost accounting

period, provided that at least one award exceeded $1 million.

The disclosure statement, which consists of eight parts, requires a contractor to

describe in summary fashion its methods and techniques for measuring,

assigning, and allocating costs.32 The more important objectives of the disclosure

statement include establishing a clear understanding of the cost accounting

practices the contractor intends to follow, defining costs charged directly to

contracts and disclosing the methods used to make such charges, and delineating

the contractor’s methods of distinguishing direct costs from indirect costs as well

as the basis for allocating indirect costs to contracts.

Once filed, the disclosure statement may be audited to determine whether it

adequately describes the contractor’s cost accounting practices and whether those

practices are compliant with the CAS.33 The disclosure statement documents a

contractor’s established cost accounting practices and is useful in determining if

any changes have occurred and, if so, whether the changes comply with the CAS.

A contractor that has filed a disclosure statement must amend the statement

whenever it changes any of its disclosed accounting practices, and if it deviates

31"Net awards” is defined in the CAS Board’s regulations to be “the total value of negotiated CAS-covered prime contract and subcontract

awards, including the potential value of contract options, received during the reporting period minus cancellations, terminations, and other

related credit transactions.” 48 C.F.R. 9903.301.

32The CAS Board’s general form for disclosure is included in appendix VI. The CAS Board has also designed a specialized disclosure

statement for use by educational institutions; this form consists of seven parts and uses terminology specific to colleges and universities.

33To be considered adequate, according to the Defense Contract Audit Manual, the disclosure statement must be current, accurate, and

complete.
15

from its disclosure statement, it may be required to submit a cost impact proposal

as described below.34

Cost Impact Process

Contractors and subcontractors receiving CAS-covered contracts are required to

agree to a contract price adjustment for “any increased costs paid to such contractor

or subcontractor” by the government because of a change in the contractor’s or

subcontractor’s cost accounting practices or because of the contractor’s or

subcontractor’s noncompliance with any applicable standard. In the event of a

change in cost accounting practices or noncompliance with a standard, a CAScovered contractor is generally required to prepare a cost impact proposal to assess

any increased costs paid by the government because of the change or noncompliance

and to estimate the appropriate adjustments, if any, to contract prices or cost

allowances; this is commonly referred to as the cost impact process.

Although the CAS Board’s regulations define the circumstances under which a

cost impact proposal is necessary for a contractor’s change in cost accounting

practices, the regulations do not specify the form and content of the cost impact

proposal.35 Rather, the manner and level of detail of the proposal are left to the

discretion of the contracting officer in accordance with the FAR.36

OTHER COST RULES

Government contractors are subject to a variety of laws governing costs on

government contracts and to various reviews to ensure compliance with those

laws. While these rules have some overlapping requirements, they each have a

discrete role in protecting the government.

FAR Cost Principles

The currently applicable cost principles are included in FAR Part 31, which

enunciates cost principles and procedures for pricing contracts and subcontracts,

as well as modifications to them, whenever a cost analysis is performed, and for

determining, negotiating, and allowing costs when required by a contract clause.37

These principles and procedures are broadly applied to government contracts,

including CAS-covered contracts. The CAS, however, take precedence over FAR

with regard to the measurement, assignment, and allocation of costs for CAScovered contracts. This primacy is assured by the OFPP Act, which provides that

34Contractors that are not required to file a disclosure statement must also consistently follow their established accounting practices and may

be required to submit cost impact proposals if they deviate from these practices.

35As discussed in chapter 4, the CAS Board has proposed a change in its regulations concerning the cost impact process.

36FAR 30.602.

37The FAR also incorporates by reference a number of OMB circulars, which state the principles for cost allowability for other organizations

such as educational institutions (Circular A-21), state and local governments (Circular A-87), and nonprofit organizations (Circular A-122).
16

costs subject to CAS requirements are not subject to other regulations that differ

with respect to cost measurement, assignment, and allocation.

As a general rule, the FAR cost principles provide that costs are allowable to the

extent that they are (1) reasonable and allocable; (2) in accord with the CAS (if

applicable, otherwise GAAP), with the contract terms, and with any limitation

specified in the FAR; and (3) are adequately documented by the contractor.38 The

definition of and requirements for each of these criteria are set forth in the FAR.

A general allocation rule in the FAR that has not markedly changed since 1959

determines whether or not a cost is allocable.39 That rule states:

A cost is allocable if it is assignable or chargeable to one or more cost

objectives on the basis of relative benefits received or other equitable

relationship. Subject to the foregoing, a cost is allocable to a Government

contract if it--

(a) Is incurred specifically for the contract;

(b) Benefits both the contract and other work, and can be distributed to

them in reasonable proportion to the benefits received; or

(c) Is necessary to the overall operation of the business, although a direct

relationship to any particular cost objective cannot be shown.

The cost principles also state more specific rules for determining the allowability

of 48 selected costs, including, for example, compensation for personal services,

cost of money, and insurance and indemnification.

A number of the FAR cost principles incorporate the CAS measurement,

assignment, and allocation rules. These principles limit the measurement and

assignment, and therefore allocability, of costs to the amounts determined using

these criteria. To the extent that these CAS requirements are incorporated into

the cost principles, they apply to all government contracts covered by the FAR.

The FAR cost principles incorporate by reference 5 of the 19 standards (including

standards concerning deferred compensation, pensions, and cost of money) and

duplicate provisions of another 4 standards (including standards concerning

consistency in direct/indirect cost charging, segregation of unallowable costs,

self-insurance, and independent research and development costs and bid and

proposal costs excluding allocation provisions).40

Non-CAS-covered contracts are subject only to those CAS that have been

incorporated into the FAR cost principles. The FAR has not incorporated CAS

38FAR 31.201-2.

39FAR 31.201-4.

40See appendix VII for a comparison of the CAS and FAR cost principle requirements.
17

requirements governing consistency (such as, for example, CAS 401, which

requires consistency in estimating, accumulating, and reporting costs), asset

capitalization and depreciation,41 cost accounting periods, standard costs, specific

cost allocation requirements, and material costs. In addition, the FAR has not

incorporated the CAS requirement for price adjustments for changes in a

contractor’s cost accounting practices.

TINA

TINA, which is applicable to both military and civilian agencies, generally

requires that contractors and subcontractors submit cost or pricing data for

contracts or contract pricing actions (such as contract changes or modifications) in

excess of $500,000 and certify that the data is accurate, complete, and current.42

There are a number of exceptions to the requirement for the submission of

certified cost or pricing data. These include cases where:

· The prices agreed upon are based upon adequate price competition;

· The prices agreed upon are based upon prices set by law or regulation; or

· A commercial item is being acquired.

In addition, contracting officials have the authority to waive the requirement for

submission of certified cost or pricing data for “exceptional circumstances.”

If a contractor submits defective cost or pricing data that was relied upon by the

government in negotiating a contract price, the government may seek a contract

price adjustment to recover the overstated amount. TINA also provides for civil

penalties (equal to the amount of the overpayment) for the knowing submission of

defective cost or pricing data and also provides for the payment of interest on

overpayments made to the contractor. In addition, the knowing submission of a

false certificate of cost or pricing data is subject to the civil and criminal penalties

of the False Claims Act and the False Statements Act.

AUDIT OVERSIGHT

Negotiated government contracts are generally subject to audit oversight

throughout the contract cycle, from negotiation to completion and final payment.

That is, cost-type contracts are audited during pricing and performance and at

final payment, and fixed-priced type contracts are audited during pricing and are

subject to post-award audit for defective pricing. An “audit and records” clause

included in every negotiated contract provides government auditors, inspector

41The FAR states that contractors may follow the CAS requirements for capitalization and depreciation but does not require them to do so.

4210 U.S.C. 2306a, 41 U.S.C. 254b.
18

generals, and GAO with access to a contractor’s books, records, accounting

procedures and practices, and other data sufficient to assess costs claimed to have

been incurred or anticipated to be incurred in the performance of the contract.

Because most CAS-covered contractors are subject to audit by DCAA, the audits it

performs are particularly relevant here. DCAA is a component of DOD and is

responsible for performing contract audits and providing accounting and financial

advisory services to all DOD components. DCAA also provides contract audit

services to a number of other government agencies.43 DCAA provides a wide

variety of contract-related services, including pre- and post-award contract audits

and cyclical system reviews.

As part of a pre-award survey, DCAA may audit the adequacy and suitability of a

contractor’s accounting system and practices for accumulating costs. DCAA may

also be asked to audit a contractor’s cost or price proposal. This could include

assessing the adequacy of the contractor’s cost accounting system and practices,

compliance of the actual estimating practices with the CAS requirements, and the

reasonableness of material and labor cost estimates. DCAA estimates that 25

percent of its workload involves evaluating whether proposed costs are

reasonable in pre-award evaluations. DCAA also performs audit reviews of

forward pricing agreements. DCAA’s audit services can be as extensive as a full

audit of the contractor’s cost accounting system and practices or may be limited to

providing rate verification information to contracting officials. DCAA also

assesses contractors’ disclosure statements for adequacy and compliance.

In the post-award area, DCAA audits CAS-covered contractors’ compliance with

the CAS. It also audits termination settlements and contract change proposals.

DCAA provides audit support to determine compliance with TINA. It also

performs audits of incurred costs, usually on a contractor-wide basis, to determine

whether incurred costs are allowable under the FAR. As part of an incurred cost

audit, DCAA will assess the adequacy of the contractor’s accounting system for

cost determinations that may be required for current or future contracts.

DCAA also performs a number of cyclical reviews such as audits of contractors’

internal controls. Periodically, DCAA may audit a contractor’s accounting and

management systems (internal controls) that have a significant impact on

government contract costs. The purpose of these audits is to assess the adequacy

of accounting and management systems for compliance with applicable laws,

regulations, and contract terms and to assess control risk to determine the degree

of reliance that can be placed upon the contractor’s internal controls as a basis for

planning the scope of other related audits.

43A number of civilian agencies perform their own audit oversight.
19

CAS APPLICABILITY

A significant benefit of the CAS is to lower the government’s risk of accounting,

pricing, and costing inaccuracies that may result in the government being

mischarged. The government recognizes, however, that the costs of CAS

compliance, both to the contractor and the government, may sometimes exceed the

benefits the CAS provide, and accordingly not all cost-based contracts are subject

to the CAS. That is, the CAS apply only to negotiated contracts in excess of a

specified dollar threshold, and certain types of contracts are completely exempt

from the CAS requirements.44 Judgments as to the level of risk and costs the

government is willing to bear have changed over time. In the context of the CAS,

the level of risk to the government can be adjusted by limiting the criteria for CAS

applicability or coverage—that is, by modifying thresholds and exemptions.

In this chapter, the Panel addresses (1) the benefits and costs of the CAS, (2) the

current CAS applicability and coverage thresholds, and (3) firm fixed-price

contracts where certified cost or pricing data is not obtained. The discussion and

conclusions reflect the Panel’s analysis of the estimated universe of CAS-covered

contracts to determine whether opportunities exist for reducing CAS applicability

and coverage while still adequately protecting the government’s interests.

BENEFITS AND COSTS OF THE CAS

Prior to promulgating standards and interpretations of them, the CAS Board is

required to take into account the:

(i) probable costs of implementation, including inflationary effects, if any,

compared to the probable benefits;

(ii) advantages, disadvantages, and improvements anticipated in the pricing

and administration of, and settlement of disputes concerning, contracts; and

(iii) scope of, and alternatives available, to the action proposed to be taken.45

Various studies have shown that it is difficult, and perhaps impossible, to quantify

with specificity the benefits and costs of complying with CAS requirements. One

study concluded that no objective cost-benefit calculation in aggregate

quantitative terms was possible for the CAS as a whole or for any individual

standard.46 The study stated that because benefits and costs are distributed over

time, they are difficult to trace, and any results would be very subjective.

Similarly, the CAS Board stated in its 1992 Statement of Objectives, Policies and

Chapter 3

44As discussed in chapter 2, those cost-based contracts that are not subject to the CAS are still covered by other cost rules that mitigate risk to

the government.

4541 U.S.C. 422(g)(1).

46Report to the Cost Accounting Standards Board by a Special Group of Consultants to Consider Issues Relating to Comparing Costs with

Benefits, November 1978. See also Cost Impact of Cost Accounting Standards, Logistics Management Institute, November 1977.
20

Concepts that quantifying the benefits that accrue to the government and

contractors alike from the continued use of the standards would be difficult, if not

impossible. Notwithstanding the difficulties in quantification, the Panel’s review

confirms that there are benefits and costs associated with the CAS.

Benefits

The CAS were designed to achieve, among other things, more uniformity and

consistency in cost accounting practices and a better understanding by the

government of the cost accounting practices that contractors use to estimate costs.

Compliance with the CAS was intended to reduce the likelihood of the

government being mischarged, reduce misunderstandings between contractors

and the government, and increase reliability of contractor cost data.47

The Panel found concrete evidence that the CAS produce direct monetary benefits.

For example, DCAA reported that it recovered about $138 million as a result of

adjustments to CAS-covered contracts over the 18-month period ending March

1998. The Panel believes that focusing only on the direct monetary benefits

substantially understates the benefits produced by the CAS. The existence and

enforcement of the standards also generate substantial tangible benefits, even

though they cannot be quantified. In fact, the CAS Board reports in its Statement

of Objectives, Policies and Concepts that benefits from the CAS include

“reductions in the number of time-consuming controversies stemming from

unresolved aspects of cost allocability, as well as greater equity to all concerned.”

Additional benefits identified by the Board are simplified contract administration,

audit, and settlement procedures; the prophylactic effect of reduced opportunities

for the manipulation of accounting methods that existed prior to the

establishment of the CAS; and the availability of better cost data, which permits

improved comparability of offers and facilitates better contract negotiation.

At the June 1998 public hearings, many government officials supported the

continued use of the CAS and stated that the standards:

· deter the misallocation of costs between government and commercial contracts;

· serve as an effective means of cost recovery if misallocation does occur;

· provide a framework that organizations can use to measure performance;

· place the contracting parties on a more equal basis; and

· keep the government apprised of contractor cost accounting changes.

47A list of potential CAS benefits identified in Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense

Contracts, by the Comptroller General of the United States, January 1970, is provided in appendix II.
21

In addition, officials of DCMC, the DOD entity chiefly responsible for the day-today administration of the CAS, stated that the standards are an important tool for

mitigating risk to the government in a cost-based business environment. These

officials contended that the CAS provide the framework and regulatory basis for

contracting officers to evaluate contractor cost accounting practices and protect

the government against inappropriate measurement, assignment, and allocation

of costs. The additional precision and administrative remedies contained in the

CAS constitute a valuable tool to ensure equitable allocation of costs under costbased contracts, the officials contended. A DCAA official testified that the CAS

serve both as a deterrent to the misallocation of costs to contracts and an

equalizer when costs have been misallocated.

Costs

The CAS generate costs that can be largely borne by the government. At the June

1998 public hearings, industry officials stated that the CAS present significant

administrative costs because the requirements to comply with the CAS are complex

and labor intensive. Modifying commercial accounting practices to comply with the

CAS, maintaining those systems, and complying with other CAS requirements, such

as the filing of disclosure statements, require more staff than is required for

commercial accounting systems. This is all added to the overhead expense

associated with establishing and maintaining CAS-compliance, expenses that are in

turn passed on to the government in part or in whole. In addition, these officials

stated that they believe the rigidity of the CAS requirements hamper a company’s

ability to react to changing business conditions in order to remain competitive.

Recent attempts have been made to estimate the costs of complying with the CAS.

One study concluded that government contracting involved an 18-percent cost

premium over commercial contracting, including a 0.7-percent cost premium

attributable to the CAS.48 While a subsequent GAO analysis of the study

concluded that the premium was overstated,49 the Panel notes that, in light of the

overall sums involved in cost-based contracting, even a small percentage would be

significant in dollar terms. Several commentators believed the premium

associated with the CAS to be significant. In this regard, representatives of a

number of companies made the following observations:

· The CAS create substantial administrative burdens and require changes to

accounting practices and systems, increasing the product costs with no

commercial advantage or product improvement, and reduce a company’s ability

to react to changing market conditions by imposing rigid requirements.

48The DOD Regulatory Cost Premium: A Quantitative Assessment, Coopers & Lybrand/The Analytic Science Corporation (TASC),

December 1994.

49Acquisition Reform: DOD Faces Challenges in Reducing Oversight Costs (GAO/NSIAD-97-48, Jan. 29, 1997).
22

· Some commercial companies cannot support the accounting overhead and

controls called for by the CAS and still remain competitive.

· Many smaller companies do not have the resources to deal with the CAS,

which can require the maintenance of government-unique accounting

practices at considerable cost.

In addition to these observations received at the Panel’s public hearings, a survey

was sent to a group of the largest government contractors and a select group of

predominantly commercial firms in an attempt to estimate the annual costs for

creating and maintaining a separate operating segment for government

business.50 These firms found it difficult to quantify the costs of complying with

the CAS. However, this survey indicated that there are costs associated with the

CAS that the government incurs in whole or in part because (1) contractors may

segregate their commercial and military segments to comply with the CAS and

other government-unique requirements, (2) some predominantly commercial

companies refuse to seek government business because of the CAS and other

government requirements, and (3) some contractors claimed that they cannot

make the best use of innovative cost accounting systems. The following

paragraphs address these three areas.

As part of acquisition reform, DOD is trying to achieve commercial-military

integration—that is, the elimination of the distinction between government and

commercial operations such that both commercial and military products are

produced on the same production line. According to the Under Secretary of

Defense (Acquisition and Technology), this concept is crucial for meeting DOD’s

future military, economic, and policy objectives.

According to a GAO report,51 DOD demonstrated that the integration has the

potential to produce benefits for the government. The report cited a 1994 Air

Force pilot program at TRW where selected military-unique parts, once

redesigned, were produced at a lower cost on the company’s automated

commercial production line than by its segregated military segment. DOD

reported that the TRW integration project for the production of military-unique

circuit boards for the F-22 aircraft resulted in a 30- to 50-percent savings and

produced a product that actually exceeded some of the government’s

requirements. Although program officials stated that the TRW pilot project saved

money on labor, materials, and overhead, GAO noted that the $21 million cost of

the project offset most of the savings. GAO contended that the real “payoff” will

come from applying the lessons learned from the pilot to future Air Force

electronics procurements.

50See appendix VIII for a list of firms surveyed.

51Acquisition Reform: Military-Commercial Pilot Program Offers Benefits but Faces Challenges (GAO/NSIAD-96-53, Jun. 28, 1996).
23

As a survey of selected firms indicated, the costs of complying with the CAS and

other government regulations can contribute to the practice of some companies

establishing separate business units for commercial and government operations.

These firms contend that it is more costly to operate a government segment than

it is to operate a commercial one, although the companies surveyed do not have

systems in place to identify those costs.52 They also state that, at the least,

separating business units for commercial and government operations deprives the

government of savings from integrated commercial/government production

processes and products and adds to the cost of complying with the CAS and other

government regulations. In addition, the Panel was told that commercial

segments at times allocate costs in a manner designed to motivate behavior in a

particular accounting period—for example, to achieve cost savings. Such a

practice by CAS-covered government segments is hindered by, for example, the

submission of cost accounting changes to comply with CAS uniformity and

consistency requirements. One panel member pointed out that consistency in

accounting is an important principle in both cost and financial accounting and

that change should not be made merely to motivate behavior.

There are also costs associated with companies refusing to do business with the

government because of the CAS and other unique federal requirements. When

firms refuse to seek government business, the available contractor base is reduced,

and the government may be denied state-of-the-art technological solutions and pay

the higher costs of reduced competition. According to a senior DOD official,

Hewlett-Packard has refused government work specifically to avoid the application

of the CAS. At the June 1998 public hearings, a General Electric official said that

several of that firm’s business segments that once did government work now refuse

that business because of the costs of complying with the CAS and FAR

requirements. That official testified that changing those commercial operating

units to become compliant with the CAS and other government-unique

requirements was an unjustifiable expenditure of valuable resources.

Some predominantly commercial firms, including members of the Integrated Dualuse Commercial Companies (IDCC) association, refuse or limit business with the

government rather than become CAS compliant.53 These companies contend that

complying with the CAS and other government regulations is costly and

burdensome. Because many of these companies produce leading-edge technologies,

the government needs access to their commercial research and development efforts.

Examples of these technologies include state-of-the-art semi-conductor chips as well

as computers that are faster, smaller, and more powerful, which are needed as

critical components in government satellites and defense weapon systems.

52See appendix VIII for a list of firms surveyed.

53IDCC membership consists of companies that have over $1 billion in annual sales with less than 10 percent of sales from federal government

contracts. A list of IDCC members is included in appendix VIII.
24

A questionnaire was sent to IDCC member companies to gain insight into why

some predominantly commercial companies limit or avoid government work.

Although the impact of eliminating the CAS alone could not be clearly

determined, all IDCC respondents stated that some of their operating segments

refused to do government business on a cost basis and some specifically cited the

costs of CAS compliance and the submission of cost or pricing data among their

reasons. Most respondents also stated that some of their operating segments

limited cost-based work with the government to remain below CAS thresholds.

Some commercial companies have reported that they established separate

segments for government work to isolate the added costs imposed by the CAS and

other government regulations and procedures. These companies claimed that they

cannot pass these added costs on to their commercial products and services

because doing so would decrease their overall competitiveness.

The Panel was told that contractors and subcontractors receiving cost-based

government contracts for the first time can find it difficult to cope with the various

federal laws, regulations, and procedures. These new entrants in the government

marketplace have generally functioned as predominantly commercial companies

that sell a very small percentage of goods and services through cost-based federal

contracts. Some new entrants contend that compliance with the CAS requirements

is burdensome. Some ultimately decide not to seek additional government business,

which may limit the government’s access to innovative technologies these firms may

have. Some are ultimately motivated to create separate operating segments for

their government business. As discussed earlier, creating and maintaining

segregated segments can be costly to both the government and contractors.

Some subcontractors also refuse to do business with CAS-covered prime

contractors. In a survey of some of the largest government contractors,

respondents cited examples where subcontractors refused CAS-covered work. This

could cause less competition and higher costs for subcontracted work and may

inhibit access to necessary technology or services. Some survey respondents

joined other companies that reported instances where non-CAS-covered operating

segments within their own companies refused to do business with them. One

respondent stated that avoidance of costs associated with government-unique

requirements, such as the CAS, is the reason its commercial divisions would not

accept work from the government business units.

New entrants to federal cost-based contracting, as well as other predominantly

commercial companies, contend that the CAS impede the use (or eliminate the

advantages) of alternative accounting practices and advanced cost management

methods. Some companies are attempting to employ alternative cost accounting

systems, such as activity-based costing (ABC),54 to reduce product and service costs

in today’s competitive environment. In this regard, a senior DCAA official stated

54ABC management systems analyze the relationships between activities and the resources they consume to determine the costs of those activities.
25

that contractors, facing strong competition in the global marketplace and a

shrinking defense budget, must change not only their production methods but how

they conduct their business; this would include embracing advanced cost

management systems. DCAA states that it encourages the use of ABC and does

not consider the CAS a barrier to the successful implementation of ABC. Some

companies believe that the government needs to facilitate the use of alternative

accounting practices and advanced cost management methods to reduce costs but

that the CAS hinder their use. Encouraging the use of these new methods,

however, could ultimately allow both the government and contractors to share the

savings associated with reduced costs.

DCAA believes that ABC can be used as an adjunct to a CAS-compliant

accounting system. Nevertheless, select industry officials have stated that CAS

administrative requirements hamper full implementation of advanced cost

management methods such as ABC. Of particular concern are requirements for

consistency in estimating, accumulating, and reporting costs and for price

adjustments due to changes in cost accounting practices. Advanced cost

management methods such as ABC allow companies to make rapid adjustments

in their organizational and accounting structures to account for market changes.

Such adjustments, however, would have to be assessed under the CAS cost impact

process, which may result in implementation delays and/or contract price

adjustments for voluntary changes. Thus, it appears that there is an inherent

tension between the flexibility presented by the optimal use of ABC and certain

CAS requirements. Industry officials say that this is the reason that some CAScovered contractors are reluctant to adopt advanced cost management methods.

DCAA states that surveys conducted in 1990, 1995, and 1997 indicate that

government contractor interest in, and actual implementation of, ABC accounting

systems is declining. The DCAA survey found that the costs of implementing

ABC, incompatibility with existing accounting and/or estimating systems, and loss

of key personnel who championed ABC were the primary reasons cited for failure

to implement ABC.

CAS APPLICABILITY AND COVERAGE THRESHOLDS

The CAS have never been applied to all contracts and subcontracts. Rather, it has

always been recognized that the benefits of CAS compliance must be weighed

against its costs. Accordingly, the CAS have been applied only to contracts and

subcontracts in excess of a specified dollar threshold. In 1970, Congress, in

establishing the CAS Board, provided that the CAS would only be applicable to

negotiated contracts and subcontracts that exceeded $100,000. In 1974, the

Board, using its exemption authority, created a “trigger” threshold of $500,000.55

The Board believed that this revised threshold rule would exempt about 70

5539 Fed. Reg. 44,389 (Dec. 24, 1974). Under this revised requirement, once a contractor received a CAS-covered contract exceeding $500,000,

all negotiated contracts over $100,000 that were awarded to that contractor were also CAS-covered.
26

percent of previously CAS-covered contracts but would still cover 90 percent of

the dollar value of the awards. In 1988, Congress, in reestablishing the CAS

Board, raised the CAS applicability threshold to $500,000 for negotiated contracts

and subcontracts.56

The CAS Board has also recognized a need to balance the costs of CAS compliance

against the benefits to the government. In 1977, the Board established two levels

of CAS compliance—full and modified coverage. As explained in chapter 2, full

coverage requires that a business unit comply with all existing standards at the

time of contract award and for subsequent contracts, whereas modified CAS

coverage requires compliance with only four of the standards. Modified coverage

was intended to address the problem of the application of the CAS to smaller

government contractors as well as the application of the CAS to those contractors

for whom government business represented only a relatively small share of total

sales volume. The Board stated that the impetus for the creation of modified

coverage was the concern that “many small companies with less sophisticated

accounting systems and small accounting staffs [could not] comply with the [CAS]

requirements without experiencing inordinate difficulty and some cost” and that

complying with the CAS requirements may cause some companies to avoid

government contracts.57

As explained in chapter 2, as originally promulgated, modified coverage was

generally applied to business segments that received less than $10 million in

CAS-covered contracts in the immediately preceding cost accounting period;

modified coverage required compliance only with CAS 401 and CAS 402. In 1993,

the CAS Board increased the threshold for full coverage from $10 million to the

current $25 million. In raising the threshold, the Board stated that it was

seeking to adjust the threshold to properly reflect the effects of inflation and to

protect the interests of the government, while lessening burdens associated with

full coverage on contractors. In addition, the Board required business segments

with modified coverage to adhere to two additional standards, CAS 405

(accounting for unallowable costs) and CAS 406 (cost accounting period), because

of reports suggesting that the government needed to be protected from

overcharging due to contractor abuses in these areas.58

While some in government believe that the current applicability and coverage

thresholds are needed to protect the government’s interests, others in government

as well as in industry expressed a view to the Panel that it is again time to review

56Although the CAS applicability threshold was raised to $500,000, the new CAS Board did not raise the trigger amount; thus, a contractor

would be subject to the CAS as soon as it received any CAS-covered contract, regardless of value. In 1993, the CAS Board applied the trigger

contract concept to the two tiers of CAS coverage. It increased the threshold for full coverage from $10 million to the current $25 million by

providing that a contractor would be subject to full coverage (rather than modified) if it received at least one contract valued at $1 million or

more. 58 Fed. Reg. 58,798 (Nov. 4, 1993).

5742 Fed. Reg. 45,625 (Mar. 10, 1978).

58The Board expanded modified coverage to include CAS 405 in response to information that contractors for some civilian agencies were

including unallowable costs in their billings to the government. 57 Fed. Reg. 47,438 (Oct. 16, 1992).
27

contract applicability and coverage thresholds. They contend that more contracts

and contractors are subject to the burden and expense of the CAS than are

necessary to adequately protect the government’s interests against significant risk

in this area. In this regard, there are concerns that modified CAS coverage has not

satisfied the CAS Board’s stated goal of providing relief to smaller government

contractors and contractors for whom government business represents only a

relatively small share of total sales volume. They stated that the CAS 401 and CAS

402 requirements for consistency and uniformity, when coupled with the cost impact

process, impose a level of rigidity and undue administrative burden that hamper a

company’s ability to respond to marketplace changes. In addition, they express

concern that commercial accounting systems do not ordinarily track unallowable

costs as required by CAS 405 and that ensuring that unallowable costs are not

allocated to government contracts could be achieved by less onerous methods.

Many believe that the government must be able to enhance its access to

commercial items and technologies and do so in a less regulated environment. On

this issue, the Panel noted that some government and industry officials believe

that the current CAS applicability and full coverage thresholds must be revised to

achieve greater commercial sector participation in government procurement. At

the public hearings in June 1998, officials from Boeing, General Electric, and 3M

testified that consideration should be given to raising the threshold, which now

subjects hundreds of business segments to the CAS.59 These officials contend that

revising the CAS applicability criteria would reduce the burden the CAS place on

industry, promote commercial-military integration, and encourage predominantly

commercial companies and new entrants to seek government contracts. Those

who do not favor major revisions to the current criteria contend that the benefits

of such revisions are uncertain, while the risk the changes would entail for the

government is significant.

While recognizing these differing views, the Panel found broad agreement that some

adjustment in the current CAS applicability criteria was necessary. It was difficult

to resolve, since it necessarily involves speculation about how companies will behave

and how much risk the government will be exposed to under the changed

circumstances of adjusted CAS applicability criteria. Rather than focus on

predicting how changes will affect behavior, the Panel searched for solutions that,

while excluding a significant percentage of currently CAS-covered contractor

segments from the CAS applicability, nonetheless would retain CAS coverage for a

very high percentage of contract dollars. Similarly, the Panel focused on the extent

to which solutions eliminated the burden associated with the CAS while protecting

the government’s interest through other controls such as the FAR cost principles.

59See appendix IX for a list of individuals who testified.
28

Threshold Analysis

In analyzing the data and conducting its analysis, the Panel searched for

solutions that would maximize the benefit of changes while limiting the

government’s exposure to risk. The Panel considered adjusting the applicability

and full coverage thresholds. The Panel also considered the use of a “trigger

contract” of at least a certain value as part of the applicability threshold—that is,

providing that only non-exempt contracts received after the award of a trigger

contract be subject to the CAS.

The original CAS Board adopted the trigger contract approach so that a contractor’s

contracts would not be subject to CAS coverage (even if above the $100,000

applicability threshold) until the contractor received a “trigger contract” of $500,000,

triggering CAS coverage for future contracts the company received that exceeded the

$100,000 applicability threshold. Under this approach, contractors with only

relatively small contracts, albeit in excess of the contract applicability threshold

(that is, contracts between $100,000 and $500,000), would not be subject to the

burden and expense of the CAS until they received a trigger contract.

The Panel analyzed the contract applicability and full coverage thresholds,

including the implications of using a trigger contract approach. To help the Panel

assess the appropriateness of the current contract applicability threshold

($500,000) and full coverage threshold ($25 million), DCAA and DCMC reviewed

CAS-covered contracts awarded from April 1997 through March 1998.60 Based on

this data, DCAA and DCMC found that there were $72 billion in CAS-covered

contracts involving 588 contractor segments during this period. Of that number,

280 are currently subject to full coverage and 308 are subject to modified

coverage. Figure 3.1 estimates the number of contractor segments and the

amount of contract dollars that would be CAS-covered under various possible

trigger thresholds.

60See appendix X for the methodology and supporting documentation used to identify the universe of CAS-covered contracts at various

threshold levels and a discussion of the data’s limitations, including that the number of contractor segments subject to modified coverage

may be understated. The Panel also collected and analyzed contract data provided by the Federal Procurement Data System (FPDS) to

identify cost-based type contract actions over $500,000, excluding an estimate of CAS exemptions, totaling almost $300 billion. The Panel

found that the distribution of dollars at various thresholds was similar for the cost-based actions identified using FPDS and for

CAS-covered actions identified using DCAA/DCMC data.
29

Figure 3.1: Comparing Current CAS Coverage With Alternative Trigger

Contract Amounts and a Full Coverage Threshold of $50 million

Note a: DCAA and DCMC were the source of the data used to prepare this analysis. The segments that would be subject to modified coverage

under a $7.5 million threshold will be between 173 (those covered with a $5 million trigger) and 94 (those covered with a $10 million trigger.).

DCAA, with the assistance of DCMC, is collecting data to better estimate the actual coverage in order to supplement the record.

In considering an adjustment to the CAS applicability threshold, the Panel found

that if the trigger contract approach were reintroduced, a large number of

contractor segments could be removed from CAS applicability, but substantially

all CAS-covered contract dollars would remain subject to the CAS. In addition to

benefiting small contractors already subject to CAS coverage, this could encourage

other small firms to enter the government marketplace where those firms have

avoided government contracts because of the potential application of the CAS.61 If,

in addition, the full coverage threshold were raised to $50 million, the number of

segments subject to full coverage could be reduced.

61This approach also recognizes the business reality that contractor segments with CAS-covered contracts will use a single CAS-compliant

accounting system for all their government contracts. That is, for these segments, the costs for all government contracts, whether

CAS-covered or not, would be accounted for under CAS-compliant systems.

Type of Number of Number of Number of Number of

Coverage segments segments segments segments

Full 280 189 189 185

Modifed 308 173 a 94

Total 588 362 279

0

10

20

30

40

50

60

70

80

$10 million

trigger

$7.5 million

trigger

$5 million

trigger

Current coverage

with a $25,000 full

coverage threshold

Dollars in billions

$72 $71 $70

$69

Modified coverage

Full coverage
30

Specifically, the Panel considered the impact of requiring a trigger contract of

between $5 million and $10 million, while retaining the current $500,000

contract applicability threshold. If a $5 million contract were required to trigger

the CAS applicability, DCAA and DCMC data shows about 98 percent of CAScovered dollars included in the survey would continue to be subject to the CAS.

The total number of contractor segments with CAS-covered contracts would

significantly decrease, as shown in figure 3.1 above. If a $10 million contract

were required to trigger CAS applicability, DCAA and DCMC data shows that

about 96 percent of CAS-covered dollars included in the survey would be subject

to the CAS, and the total number of contractor segments with CAS-covered

contracts would again significantly decrease, as shown in figure 3.1 above.

Although a trigger contract of $10 million would continue to subject about 96

percent of current CAS-covered dollars to CAS coverage, a number of segments

that would have been subject to full coverage (at a $50 million full coverage

threshold) would fall completely from CAS coverage because none of these

segments had received a contract of $10 million or more. Because of this

phenomenon, the Panel explored other trigger contract amounts within the range

between $5 million and $10 million and found that with a trigger contract of $7.5

million about 97 percent of current CAS-covered dollars would continue to be

subject to the CAS and that no segment that would be subject to full coverage (at

the $50 million threshold) would fall completely from CAS coverage.

The use of a trigger contract appears to protect the government’s interests better

than simply raising the contract applicability threshold, while still relieving a

substantial number of contractor segments of the burdens of the CAS. For

example, if the individual contract applicability threshold were raised to $5

million, the number of contractor segments subject to the CAS would again

significantly decrease, but only about 88 percent of the CAS-covered dollars would

continue to be subject to the CAS. Such an alternative does not account for the

fact that contractor segments with some CAS-covered contracts will use a single

CAS-compliant accounting system for all of their contracts. Thus, the benefit of a

large rise in the CAS applicability threshold would be relatively small for

contractors that continue to have contracts subject to the CAS because those

contractors would continue to be required to maintain a CAS-compliant

accounting system. However, if the applicability threshold were so raised, the

number of contracts subject to price adjustments through the cost impact process

for CAS noncompliance or for changes in a contractor’s disclosed accounting

practices would be significantly reduced. Specifically, at a $5 million applicability

threshold level, the government would lose the right to seek price adjustments

under the cost impact process for about $8 billion in contract value (the difference

between current coverage and this alternative); this is in contrast to the use of a

$7.5 million trigger contract (while retaining the current $500,000 CAS

applicability threshold), under which the government would lose the right to seek

price adjustments under the CAS for about $2 billion in contract value.
31

The Panel believes that raising the full coverage threshold and adopting a trigger

contract approach, without raising the applicability threshold, would not

significantly affect risk to the government. As noted above, not all contracts and

subcontracts have been made subject to the CAS. Rather, as it has always been

recognized, the benefits of CAS compliance must be weighed against their costs. As

a result of its analysis, the Panel concludes that the risk to the government would

be low if a $7.5 million contract were required to trigger CAS applicability and the

full coverage threshold were increased to $50 million. This would result in about 97

percent of surveyed CAS-covered dollars remaining subject to either full or modified

CAS coverage, with the overwhelming majority of the dollars (over 90 percent) being

subject to full coverage. With regard to the segments that would no longer be

subject to the CAS, the Panel also notes that, whether the CAS apply or not,

contractors would still be required to adhere to the FAR cost principles and

allocation rules and DCAA would continue to perform audits and reviews of nonCAS-covered contracts where necessary to protect the government’s interests.

FIRM FIXED-PRICE CONTRACTS

Currently, firm fixed-price contracts and subcontracts that satisfy CAS applicability

requirements are subject to CAS coverage if “any cost data” (certified or noncertified) is submitted at the time of award.62 Although the CAS Board has not

defined the term “any cost data” with respect to this exemption, in Aydin

Corporation v. Widnall,63 it was held that the submission of informal cost data was

considered to be “any cost data,” even if such data was obtained to check for

mistakes or major omissions in offers and not to negotiate price.

Many in industry and government oppose the application of the CAS to firm fixedprice contracts and subcontracts where TINA is not applicable. They note that

TINA was revised as part of acquisition reform to ensure that certified cost or

pricing data is not obtained where pricing risk to the government is considered

low, such as where price is based upon adequate price competition.64 Exempting

firm fixed-price contracts and subcontracts that are not subject to TINA from CAS

coverage would also be low risk, in their view, because cost data is not the basis for

determining the agreed contract price, and the contract price is not subject to

adjustment based upon the contractor’s cost experience in performing the contract.

In sum, these commentators state that the application of the CAS does not offer

sufficient value to the government, for example in the mitigation of risk, to offset

the burdens of the CAS.

62The CAS Board has exempted “[f]irm fixed-price contracts and subcontracts awarded without the submission of any cost data.”

6361 F.3d 1571 (Fed. Cir. 1995).

64Prior to FASA, TINA did not require agencies to exempt procurements from cost or pricing data submission requirements when a statutory

exemption was applicable. FASA made mandatory the statutory exceptions to obtaining certified cost or pricing data (for example, where there is

adequate price competition).
32

The Panel believes that firm fixed-price contracts and subcontracts should be

exempt from CAS coverage when the government does not obtain certified cost or

pricing data at the time of award. When certified cost or pricing data is not

obtained for firm fixed-price contracts and subcontracts, the safeguards provided

by the CAS are not necessary.

The Panel notes that some of the cost or pricing risks to the government inherent

in cost-reimbursement contracts are not present in firm fixed-price contracts and

subcontracts. This is so because firm fixed-price contracts do not provide for

adjustment of the agreed price based on changes in a contractor’s costs during

contract performance. Thus, the actual costs incurred during contract

performance do not affect what the government pays under a firm fixed-price

contract, and changes in a contractor’s cost accounting practices during contract

performance should not affect the final price.

Furthermore, TINA, as implemented, generally does not allow the contracting

officer to request the submission of certified cost or pricing data where there is

adequate price competition, the prices are set by law or regulation, or the

acquisition is for commercial items.65 In these situations, the risk to the

government in negotiating contract prices is not considered high enough to

warrant obtaining certified cost or pricing data. The Panel believes that this risk

assessment should be equally applicable to the CAS. That is, where a firm fixedprice can be established without obtaining certified cost or pricing data, the risk

to the government of not applying the CAS to these contracts and subcontracts is

relatively low.66 Conversely, where it is determined that certified cost or pricing

data is required for the negotiation of a firm fixed-price contract, this indicates a

higher level of risk to the government and should, within the applicable criteria,

trigger the application of the CAS requirements.

As discussed above, while the CAS provide significant benefits to the government,

they also impose significant burdens on covered contractors and generate costs that

are largely borne by the government. For example, contractors may segregate their

commercial and military segments to comply with the CAS or refuse to seek

government business because of the CAS and other government requirements. The

Panel believes that the pricing risks to the government are sufficiently small on firm

fixed-priced contracts where no certified cost or pricing data has been obtained. This

exemption would seem particularly helpful to firms with fixed-price subcontracts.

The survey of 50 DOD prime contractors found, as shown in Figure 3.2, that firm

fixed-price subcontracts accounted for 11.8 percent of the total cost-based sales.

65Moreover, even if a contract does not fall under one of these three exceptions to certified cost or pricing data requirements, there is provision

for a waiver of the requirement for certified cost or pricing data in “exceptional circumstances.” 10 U.S.C. 2306a(b)(1)(C), 41 U.S.C.

254b(b)(1)(C). See also House Conference Report No. 105-736, September 22, 1998.

66Modifications to non-CAS covered contracts are generally not subject to the CAS. However, contracting officers may rely on various

provisions of the FAR and TINA to ensure confidence in the pricing. For example, a contracting officer may request certified (for

modifications in excess of $500,000 for non-commercial items) or non-certified cost or pricing data when negotiating the price of contract

modifications.
33

Figure 3.2: Type of Subcontracts Used by Selected DOD Contractors on

Cost-Based Government Contracts

CONCLUSION

Reintroducing the trigger contract approach to the applicability criterion, raising

the full coverage threshold, and exempting firm fixed-price contracts from CAS

coverage unless certified cost or pricing data is obtained would significantly

alleviate the burdens the CAS pose to hundreds of companies, while continuing

CAS coverage on the vast majority of current CAS-based dollars. The Panel

believes that these changes will (1) promote commercial-military integration,

which should provide savings to the government; (2) encourage predominantly

commercial companies to seek government business, thus increasing government

access to leading edge technologies; and (3) remove an industry perceived obstacle

to using advanced cost management methods which could lead to shared cost

savings with the government. In addition, these changes will reduce the burden

on smaller business segments but will retain coverage for large business

segments. Conversely, the Panel’s analysis of the potential negative impact of

modifying the thresholds shows that requiring the receipt of a trigger contract to

activate the application of the CAS and raising the full coverage threshold, as well

as exempting firm fixed-price contracts and subcontracts where certified cost or

pricing data is not obtained, pose relatively little risk to the government, and that

this risk is worth taking in view of the benefits that will be obtained.67

67As described in chapter 4, the Panel also believes that CAS 405 and CAS 406 should not be included in the definition of modified coverage.

Cost-based subcontracts

Firm-fixed price subcontracts

72.5% Prime contractors in house

15.7%

11.8%
34

RECOMMENDATIONS

The Panel recommends that Congress amend the OFPP Act of 1988 to provide

that the applicability of the CAS to non-exempt contracts be triggered only by

receipt of a contract of $7.5 million or more. The Panel recommends that the

current $500,000 contract application threshold remain unchanged. The Panel

also recommends that the threshold for full CAS coverage be increased from $25

million to $50 million. The Panel endorses the CAS Board’s desire, as reflected in

the Board’s October 17, 1991 minutes and recently confirmed at the Panel’s

meeting with the CAS Board, to periodically examine the thresholds for possible

adjustment for inflation or marketplace changes. The Panel also recommends

that firm fixed-price contracts and subcontracts be exempt from the CAS in those

cases where the government does not obtain certified cost or pricing data at the

time of award.
35

THE CAS BOARD’S OPERATIONS

AND REVIEW OF THE STANDARDS

As detailed in chapter 1, recent reforms have sought to streamline the acquisition

process and facilitate contracting with the government. Statutory and regulatory

changes have resulted in the lessening of burdens facing government contractors.

Contracting officials have been vested with more discretion to allow them to better

exercise their business judgment in making contracting decisions. Underlying these

reforms is the belief that reducing hurdles to contracting with the government and

expanding contracting agencies’ discretion will result in substantial cost savings.

In this chapter, the Panel examines the operations of the CAS Board and the CAS

for possible changes in light of acquisition reform and the evolution of GAAP and

commercial accounting systems. Specifically, the Panel considered whether (1) the

Board should continue to maintain as broad a role in contract administration

functions associated with the CAS and (2) a review of the CAS and its attendant

requirements should be undertaken for possible streamlining.

ACCOUNTING RULES VERSUS CONTRACT ADMINISTRATION

In establishing and then reestablishing the CAS Board, Congress provided that the

Board, in addition to issuing the CAS, would be involved in matters that are

traditionally performed by contracting agencies as part of contract administration.

For example, the Board was directed to issue regulations for the implementation of

the CAS requirements and to require that contractors disclose their cost accounting

practices and agree to a contract price adjustment for any increased costs paid to such

contractor or subcontractor because of a voluntary change in their cost accounting

practices or their failure to comply with the CAS. The legislative history of the

original authorizing statute shows that, in setting up the CAS Board, Congress

believed that it was important that an independent agency, rather than the

contracting agencies, be responsible for establishing and ensuring the implementation

of the CAS. This belief was based, in part, upon a lack of confidence that the

contracting agencies would properly establish and implement an effective system.

Consistent with its statutory authority, the CAS Board promulgated requirements in

a number of contract administration areas that have traditionally been the

responsibility of contracting agencies. For example, the CAS Board promulgated a

CAS clause that contracting agencies are required to include in covered contracts

and retained the authority to determine when a waiver from CAS requirements is

appropriate in a particular procurement for a particular contractor or subcontractor.

Recently, the Board has proposed a rule that details the cost impact process

contracting agencies must follow in negotiating claims associated with CAS

coverage with their contractors.

Chapter 4
36

Nevertheless, the Board recognizes the contracting agencies’ traditional contract

administration responsibilities. The Board states in its Statement of Objectives,

Policies and Concepts that it is those agencies’ responsibility to receive, review, and

approve disclosure statements; to audit covered contractors/subcontractors to

ensure compliance with the CAS and their disclosed cost accounting practices; to

make appropriate contract price adjustments because of changed accounting

practices, failure to follow the existing CAS, or the issuance of new standards; and

to ascertain the validity of contractors’ and subcontractors’ exemption claims.

As described in chapter 1, one theme of recent acquisition reform has been an

increase in the discretion accorded agencies and their contracting officials in

carrying out procurements. This is materially different from the situation at the

time the CAS Board was first established, when Congress felt it had to closely

regulate agency procurement activities. In light of this and the contracting

agencies’ traditional role in administering contracts, consideration should be

given to separating the CAS Board’s primary responsibility of promulgating and

maintaining standards for government contracts from the implementation and

administration of those requirements.

As a part of its review, the Panel examined the CAS Board’s administration of

waiver requests and the proposed regulation governing the cost impact process.

These areas were selected because their current administration by the CAS

Board has generated controversy.

Waivers

Congress gave the CAS Board specific authority to exempt categories and classes

of contractors and subcontractors and to establish procedures for the waiver of

the CAS requirements with respect to individual contracts and subcontracts.68

Although the law is silent regarding the authority of the Board to delegate its

authority, the legislative history indicates that Congress intended that the CAS

Board itself could choose to delegate waiver authority to agency heads.

Specifically, by consensus amendment, Congress adopted language that simply

authorized the CAS Board to establish procedures for the waiver of the CAS

requirements. In support of the consensus amendment, the Senate noted that:

The Board itself shall determine appropriate procedures for waiver, including

the appropriate officials for granting waivers. Waiver of “classes of contracts”

may be granted only by the Board itself.69

6841 U.S.C. 422(f)(3)(B).

69134 Cong. Rec. S16849-52 (October 19, 1988).
37

The CAS Board rarely delegates its waiver authority. However, in 1995, the Board

delegated to executive agencies the authority to waive the application of the CAS

to “individual firm fixed-price contracts for the acquisition of commercial items

when cost or pricing data is not obtained.” Also, the CAS Board has delegated to

agency heads the authority to waive the submission of a required disclosure

statement before contract award where it was impractical to secure the statement

at that time.

In its Statement of Objectives, Policies and Concepts, the Board anticipates that

waivers would be granted only in “rare and unusual” cases. This view is confirmed

by the stringency of the Board’s waiver procedures, which provide that an agency

seeking a waiver must describe the contract or subcontract to be waived and

provide the following information: (1) a statement that the contractor/

subcontractor refuses to accept the contract or subcontract containing all or part

of the CAS clause and the reason for the refusal; (2) whether the proposed

contractor or subcontractor has in the past accepted a contract or subcontract

containing the CAS clause; (3) the amount of the proposed award and the sum of

all awards by the agency to the contractor and subcontractor in the preceding 3

years; (4) a statement that no other source will satisfy the agency’s needs on a

timely basis; (5) the alternative methods considered for filling the agency’s needs;

and (6) the steps taken to establish other sources of supply for future contracts for

the products or services for which a waiver is being requested.

In the 10 years since the CAS Board was reestablished, there have been only 14

requests made to the Board for the waiver of CAS requirements.70 While it

appears that the CAS Board promptly considers waiver requests, a number of

industry officials claim that the stringent criteria for granting waivers discourage

firms from seeking them, even if firms believe that a waiver is appropriate.71

Senior DOD procurement officials also state that the criteria are overly

restrictive, thereby greatly inhibiting the waiver process.

DOD believes that the current waiver process does not provide adequate

flexibility to meet the agencies’ individual procurement needs and that the

authority to grant waivers should be delegated to the contracting agencies. For

example, DOD states that the CAS requirements hinder efforts to obtain the

participation of some advanced technology firms, which will not accept

government business that would require compliance with the CAS. Officials from

NASA and OPM have agreed with DOD that, with appropriate safeguards,

procuring agencies, who are the most knowledgeable about any particular contract

70In contrast, the original CAS Board received more than 50 requests for waiver of CAS requirements. It should be noted that many of those

requests predate exemptions that the Board ultimately adopted and that would appear to be applicable today. For example, many of the

requests were from United Kingdom or other foreign contractors or subcontractors that apparently would be performing the contract work

outside the United States, which fall under an applicable exemption to the CAS.

71See appendix XII for information on the waivers granted since 1988.
38

or subcontract, could most efficiently and best protect the public interest by being

the ones to decide when and how the CAS requirements should be waived.

However, officials from the Department of Transportation and the Environmental

Protection Agency believe that the CAS Board should have the sole authority to

approve waiver requests because the delegation of such authority to the agencies

could result in inconsistent treatment of contractors.

In the Panel’s view, the decision to grant or deny a waiver request in a particular

procurement is a matter of contract administration and business judgment

primarily for consideration by the contracting agency. Although the CAS Board

has maintained this authority in the past, procurement rules have evolved in the

direction of empowering contracting officials to exercise business judgment. For

example, procedures for the acquisition of commercial items and simplified

acquisition procedures have streamlined the procurement process and now give

contracting officers greater discretion in acquiring products and services. By

contrast, the CAS Board’s restrictive criteria for granting waivers (e.g., an

unequivocal statement that a contractor refuses to accept a contract with the CAS

requirements and that no other source will satisfy the government’s

requirements) have basically remained unchanged since their adoption in 1973.

The Panel thinks that the value of possible increased uniformity gained by

having the CAS Board maintain waiver authority is outweighed by the benefits of

having contracting agencies exercise control over their own contract

administration (with appropriate oversight and reporting requirements). In

addition, the Panel believes that the CAS Board would be able to maintain

control over uniformity because the authority to issue class deviations is not

delegated to the procurement agencies (the delegated waiver authority is limited

to particular contracts or particular standards for a particular contractor).

Contracting agencies are in the best position to exercise their business judgment

regarding their contractors and subcontractors and to determine whether CAS

requirements need to be waived (and, if so, which ones) in order to best satisfy the

agency’s acquisition requirements. The Panel notes that contracting agencies are

entrusted to waive procurement regulations in unusual cases, where, in their

judgment, the waiver serves the government’s interest. For example, under FAR

subpart 1.4, deviations from the FAR may be granted by agency heads or their

designees when necessary to meet the specific needs of the agency.72 Given the

enhanced discretion that contracting agencies have gained under recent

procurement reform initiatives, the Panel believes that contracting agencies

themselves should determine whether CAS waivers are appropriate in accordance

with criteria to be provided in the FAR.73

72FAR 1.402 states that “[t]he development and testing of new techniques and methods of acquisition should not be stifled simply because

such action would require a FAR waiver.”

73While there may be some possibility of inconsistent treatment of contractors by individual agencies in considering waiver requests, such a

possibility is inherent in any process in which agencies are expected to exercise their business judgment in a reasonable manner.
39

Cost Impact Process

The statute establishing the CAS Board directed the Board to issue rules and

regulations for the implementation of the CAS promulgated under its authority,

including regulations dealing with the cost impact process.74 Contractors and

subcontractors are required to agree to contract price adjustments for any

increased costs resulting from a change in a contractor’s or subcontractor’s cost

accounting practices or because of noncompliance with the CAS. The statute

requires that these contract price adjustments be made to the contractor’s CAScovered contracts.

The CAS Board’s regulations require contract price adjustments when CAScovered contracts are materially affected by a cost accounting practice change or

by a CAS noncompliance. The current regulations, however, do not specify the

form and content which cost impact proposals must take or the method for

recovering the costs; these are left to the contracting agencies to determine in

accordance with the FAR. In response to both industry and government concerns

about the cost impact process, the CAS Board has proposed a new rule governing

the cost impact process and defining more specifically what constitutes a change

in cost accounting practice.75

Among other things, the proposed rule details the methodology for determining

required contract price or cost accumulation adjustments due to changes in a

contractor’s cost accounting practices and specifies the actions to be taken by the

contractor and the cognizant federal official (e.g., the contracting officer or other

agency official authorized to act in that capacity), including the negotiation of the

cost impact settlements on behalf of the government. The proposed rule also

provides procedures for handling non-compliance actions.

Although the new cost impact process proposed by the Board is more detailed than

the one currently provided, the Board’s proposal indicates a belief that the change

would result in a more efficient and timely process for the resolution of material

cost impacts. Some government and industry commentators, on the other hand,

see this proposed rule as intrusive and greatly increasing the expense associated

with the cost adjustment process. They believe the CAS Board’s proposed rule, if

finalized, would encroach on individual contracting agencies’ traditional contract

administration responsibilities.

7441 U.S.C. 422(h)(1)(B).

75The CAS Board has stated that, based upon work performed by DCAA, the process for determining and resolving the cost impacts attributable to a contractor’s change in a cost accounting practice should be made more explicit in the Board’s regulations. As of the date of this report,

a final rule had not been issued.
40

REVIEW OF THE STANDARDS

There has been controversy concerning whether some of the CAS unduly

incorporate allowability and procurement policy considerations and unnecessarily

deviate from GAAP. The Panel believes that a review of the CAS and their

attendant requirements is warranted to ascertain whether improvements or

streamlining of the standards can be made in light of these concerns. Also, the

Panel believes that there is no longer any need to require compliance with CAS

405 and CAS 406 under modified coverage.

Allowability and Procurement Policy

When it reestablished the CAS Board, Congress made it clear that it intended

that the Board limit its authority to cost accounting rules and not expand it to

cost “allowability and similar policy issues,”which are regulated by the procuring

agencies in the FAR.76 The CAS Board itself recognized this limitation of its

authority when it stated in its Statement of Objectives, Policies and Concepts

that it does not determine the allowability of categories or individual items of

costs; “allowability is a procurement concept affecting contract price and in most

cases is established in regulatory or contractual provisions.”

The Panel did not conclude from its review that any of the CAS were in effect cost

allowability rules. However, the Panel received testimony and presentations from

a number of commentators asserting that provisions of CAS 404, 409, 412, and

413 reflect undue concern with procurement policy and recovery of costs rather

than establishing appropriate accounting practices.

The CAS versus GAAP

Generally, the CAS are concerned with cost measurement, assignment, and

allocation, while GAAP are concerned with cost measurement and assignment.

The Panel found that 6 of the 19 standards govern areas not addressed in GAAP,

either in whole or in part. More specifically, GAAP do not have requirements for

consistency in allocating costs for the same purpose (CAS 402), allocating direct

and indirect costs (including home office and general and administrative costs)

(CAS 403, 410, and 418), segregating unallowable costs (CAS 405), or calculating

the cost of money for capital assets (CAS 414). In addition, while three of the

standards (CAS 401—consistency in bidding and accumulating costs, CAS 407—

use of standard costs for direct material and direct labor, and CAS 417—cost of

money on constructed assets) have parallel concepts in GAAP, their GAAP

counterparts have no practical application to contract costing.

76Senate Report No. 100-424 at 17 (1988), reprinted in 1988 U.S.C.C.A.N. 5687, 5703.
41

Nevertheless, 10 of the 19 standards have some related GAAP requirements that

deal with the measurement and assignment of costs. Two of these standards have

requirements similar to GAAP.77 While eight of the standards (asset valuation

(CAS 404 and 409), restructuring (CAS 406), pensions (CAS 412 and 413),

insurance (CAS 416), deferred compensation (CAS 415), and independent research

and development and bid proposal costs (CAS 420)) differ from GAAP in the areas

of measurement and assignment to cost accounting periods, they include many

provisions that follow GAAP as well as certain provisions that do not.78

Although most of the areas of difference between the CAS and GAAP have not

been the subject of criticism, some areas where they differ have been the subjects

of controversy, in particular, CAS 404, 412, and 413. The Panel received testimony

at the public hearings that criticized some of the CAS as inappropriately deviating

from GAAP.79

While it is clear that the CAS cannot be replaced in total by GAAP for the purpose

of measuring, assigning, and allocating costs to government contracts, there are

significant instances where GAAP principles have requirements similar to a

number of the CAS as well as instances where the CAS and GAAP significantly

differ. The standards should be reviewed to reflect the knowledge of 20 years of

government and industry experience, the evolution of GAAP, and the advent of

acquisition reform. Such a review could include revising particular section(s) of a

standard, combining section(s) of the same or different standards, eliminating

particular section(s) of a standard, or eliminating a particular standard in its

entirety, and holds the promise of possibly providing opportunities for

streamlining the CAS and allowing for more flexibility for contractors while still

ensuring adequate uniformity and consistency.

Modified Coverage

As discussed in chapter 3, in 1993, the CAS Board, while increasing the threshold

for full coverage from $10 million to $25 million, also expanded the definition of

modified coverage by requiring business segments subject to modified coverage to

adhere to CAS 405 (accounting for unallowable costs)80 and CAS 406 (cost

accounting period)81 in addition to CAS 401 and CAS 402.

77CAS 408 (compensated personnel absences) and CAS 411 (acquisition costs of material) duplicate in part GAAP promulgations.

78See appendix XIII for a more detailed analysis of the similarities and differences between the CAS and GAAP.

79See appendix IX.

80CAS 405 provides for the identification of costs that are not allowable for government contracts and establishes guidelines for the cost

accounting treatment to be accorded identified unallowable costs.

81CAS 406 provides that a contractor must use its fiscal year as its cost accounting period and establishes consistent practices for the

accumulation and allocation of costs from one accounting period to the next.
42

In expanding the definition of modified coverage to include adherence to CAS 405,

the Board stated that it was concerned that some government contractors,

particularly those who work for certain civilian procurement agencies, may be

including specifically identifiable unallowable costs in indirect costs pools that are

reflected in the billings submitted to, and reimbursements received from, federal

government contracting agencies.82 The Board believed that conformance with the

requirements of CAS 405 would restrict this practice.

The CAS Board added CAS 406 to modified coverage because the Board believed

that standard stated a basic requirement with which government contractors

engaged in cost-based contracting should be able to comply. Although the Board

stated that CAS 406 would provide some protection to the government from the

selection of inconsistent cost accounting periods with respect to the costing and

pricing of contracts, the Board did not identify this as a particular problem with

respect to contractors that were subject to modified coverage. In fact, data

provided by DCAA shows that DCAA rarely cites noncompliances under CAS 406.

The FAR cost principles also require the identification and segregation of

unallowable costs.83 In addition, the FAR provides that no proposal shall be

accepted and no agreement made to establish final indirect cost rates until the

costs have been certified by the contractor.84 This implements congressional

requirements that, since FASA, provide significant penalties for the failure to

segregate unallowable indirect costs under government contracts in excess of

$500,000.85 Specifically, a contractor that includes unallowable indirect costs in a

covered contract may be subject to a penalty of up to two times the amount of the

disallowed costs plus interest.86 These penalties are in addition to possible

penalties under the False Claims Act and False Statements Act for a contractor’s

falsely certifying its indirect cost rates.

Since requirements for certifications and the imposition of penalties have been

extended to civilian agencies, the Panel concludes that there is no longer a need to

include CAS 405 and CAS 406 in the definition of modified coverage.87 The

government’s interests in these areas are adequately protected by statute and the

FAR. Conversely, not requiring adherence to CAS 405 and CAS 406 as part of

modified coverage would greatly benefit new entrants to the government

8258 Fed. Reg. 58,798 (November 4, 1993).

83FAR 31.201-6.

84FAR 42.703-2.

85FASA, Section 2351, October 24, 1994. Prior to FASA, penalties were only provided for the failure to segregate unallowable costs under

defense contracts in excess of $100,000.

8610 U.S.C. 2324(b), 41 U.S.C. 256(b); see also FAR 42.709-1.

87The Panel acknowledges that GAO supported the addition of these two standards in 1993; however, additional legislative protection, as

discussed above, was enacted subsequent to GAO’s support for adding these two standards to the definition of modified coverage.
43

marketplace and smaller commercial concerns that often rely upon commercial

accounting systems that do not ordinarily track unallowable costs. The Panel

believes that although contractors that have been subject to full coverage find

little difficulty in complying with modified CAS coverage (including CAS 405 and

CAS 406), contractors that have not previously been subject to the CAS find even

modified CAS coverage to be burdensome and costly.

Disclosure Statement

The original disclosure statement was developed and promulgated in the early

1970s. No revisions to that document were made until after the Board was

reestablished. In 1992, some minor revisions were made, and subsequently a

project was initiated to revise and update the disclosure statement. The current

disclosure statement became effective February 28, 1996.

The CAS Board revised the disclosure statement with the goal of bringing it up to

date in light of two decades of experience. The Board believed that the revised

disclosure statement would improve the cost accounting practices followed by

contractors when estimating, accumulating, and reporting costs deemed allocable

to federal contracts. In the Board’s view, adequate disclosure of cost accounting

practices is essential to ensure consistency in cost measurement, assignment, and

allocation. The CAS Board believed that an updated disclosure statement would

facilitate interaction between contractors and government representatives when

dealing with contract costing matters. The CAS Board also believed that the

introduction of the revised statement would not impose any new burden on

contractors, as it merely replaced an existing form that required periodic updating

of disclosed practices. To further reduce the possibility of increased costs, the

extended dates for the submission of the new disclosure statement were designed

to provide an opportunity to delay submission until a time when, in most cases,

the contractors would have had to file an updated disclosure form, even if a new

disclosure statement had not been introduced.

Industry representatives state that the revised disclosure statement is far more

burdensome than the previous one and that the additional information requested

requires contractors to expend considerable additional time and costs. These

representatives question whether the government needs the requested additional

information or is obtaining commensurate benefits from this information that

offset the costs of completing the revised statement.

In justifying the new disclosure statement, the Executive Secretary for the CAS

Board estimated in December 1995 that it would take only about 35 hours for a

contractor to prepare and submit the revised form (the previous form was estimated

to take 40 hours). The Executive Secretary also estimated that the government’s

review of the revised statement would take only about 8 hours per statement
44

(review of the previous form took 40 hours). These estimates are disputed, however.

One company stated that the Board’s estimate grossly understates the true burden

and estimated that it took 2,437 hours to complete only Part VII of the statement.

While the new CAS Board did extensive theoretical analysis and obtained

comments from industry and government representatives before promulgating

the revised disclosure statement, it did not conduct any field testing.88 This is in

contrast to the original CAS Board, which conducted extensive field testing before

promulgating the first disclosure statement requirements. If the Board had

conducted field tests, it could have more accurately determined the time needed

to complete the disclosure statement and assessed the need for, or benefit from,

specific data requests. If such an analysis were performed in the future, the

Panel believes the CAS Board might identify ways to simplify and streamline the

disclosure statement.

CONCLUSION

Although Congress originally directed the CAS Board to involve itself in contract

administration matters concerning the CAS, this may no longer be necessary, at

least with regard to granting waivers and specifying the cost impact process.

Rather, the Panel believes that allowing contracting agencies to handle contract

administration functions as part of their traditional role in administering

contracts, and thus allowing the CAS Board to focus on maintaining a system of

accounting standards, would be more efficient, expeditious, and consistent with

the goals of acquisition reform.

The Panel also believes that an overall review of the CAS and their attendant

requirements is warranted. There are also a number of standards involving

procurement policy and funding considerations that some commentators claim to

be inappropriate and should be reviewed. There are also areas in which the CAS

and GAAP overlap or differ and should be reviewed for possible streamlining.

The Panel also found that adherence to CAS 405 and CAS 406 as part of modified

coverage is no longer necessary, and that the recently revised disclosure

statement may be unnecessarily burdensome.

RECOMMENDATIONS

The Panel recommends that Congress ensure that contracting agencies, rather

than the CAS Board, have primary responsibility for administering individual

contracts with respect to applicable CAS requirements. With respect to waiver of

88In its final rule, the CAS Board stated that it tried to be responsive to suggestions made by commentators and that it undertook a careful

reevaluation of Part VII. For example, the Board pointed out that the instructions were revised to make clear that only relevant cost

accounting practices and applicable identifying data need be disclosed and that, therefore, submission of numeric data representing

accounting estimates is not required.
45

the CAS requirements, the Panel recommends that Congress explicitly provide

contracting agencies with the authority to waive those requirements and specify

that the FAR establish criteria for the waivers. This authority should reside at a

senior policy level within the contracting agency and be exercised only when

necessary to meet the needs of the agency. The authority to grant waivers should

be limited to (1) the waiver of specific requirements or standards in an individual

contract or subcontract or (2) the waiver of a particular standard or part of a

standard for an individual contractor. The waivers should not serve as class

exemptions to circumvent any specific CAS requirement. The Panel recommends

that a public report of grants of waivers be made on an annual basis by

contracting agencies to the OFPP Administrator or the CAS Board, so that the

number and kinds of waivers being granted can be monitored.

The Panel also believes that the current standards and disclosure statement

should be reviewed to identify ways to simplify and streamline them in light of

acquisition reform and experience. Any such review should consider differences

and similarities with GAAP and reevaluate the standards in light of the expressed

concerns that the standards might reflect undue consideration of procurement

policy issues. The Panel also concludes that there is no longer any need to require

compliance with CAS 405 and CAS 406 under modified CAS coverage.
46

NEED FOR AND ORGANIZATION OF THE CAS BOARD

In this chapter, the Panel responds to the congressional request for its views on

the need for the CAS and the CAS Board and on whether changes need to be

made to the Board’s organization. The Panel strongly believes there is a need for

an independent CAS Board to promulgate and amend the CAS as necessary. As

discussed below, the Panel recommends changes in the Board’s location, structure,

and staffing and other support.

CONTINUED NEED FOR A CAS BOARD

As indicated in chapter 1, Congress established the CAS Board in part because

negotiated cost-based contracts represented the majority of procurement dollars

and were likely to be significant in the foreseeable future and because there was a

perceived need to protect the government’s interests by establishing accounting

rules to uniformly and consistently account for contractors’ costs. The Panel’s

review discloses that negotiated cost-based contracts continue to represent the

majority of all federal contracting dollars.89 For this reason, the Panel believes that

the original purposes of the CAS--principally the need to protect the government

from the risk inherent in cost-based contracts and to improve communications

between the government and contractors with regard to these contracts--remain.

Thus, the Panel reached the firm conclusion that there is a continuing need for

standards to govern the measurement, assignment, and allocation of costs.

The Panel believes just as strongly that there is also a continuing need for a CAS

Board to promulgate, amend, and maintain the CAS. The standards issued by the

Board establish a framework for contractors to measure, assign, and allocate costs,

whereas other procurement regulations have much broader applications, such as

the establishment or implementation of government procurement policy objectives

and the determination of the allowability of particular costs. To achieve the overall

objectives of uniformity and consistency in accounting for costs, the CAS must take

precedence over other procurement regulations. As discussed in chapter 1, during

the period when there was no CAS Board, considerable controversy emerged over

the interpretation of 9 of the 19 standards, including alleged attempts by DOD to

meet procurement policy objectives through that agency’s interpretation and

proposed amendment of the CAS. These problems were the primary impetus

leading to the reestablishment of the Board, and the Panel believes that similar

concerns could reappear in the absence of a Board. Moreover, the CAS Board’s

accomplishments since 1990, such as revising the full coverage threshold for the

CAS, are indications of the continuing need for such an entity.

Chapter 5

89See appendix XIV.
47

ORGANIZATION OF THE CAS BOARD

The original CAS Board was located in the legislative branch, whereas the current

Board is located in the executive branch in OFPP, and thus within OMB. (See

Table 5.1.) There were five members on the original CAS Board, the same number

as on the current CAS Board. The original CAS Board was chaired by the

Comptroller General, who appointed all other members, whereas the current

Board is chaired by the OFPP Administrator, who appoints two of the other

members.90 The majority of the original Board members were from the private

sector (including two from the accounting profession), while the majority of the

current Board members are government employees.91 The original CAS Board

received a separate appropriation, whereas the current’s Board’s funding is

supplied in OMB’s appropriation. Finally, the present Board has considerably less

staffing support than the original Board.

Table 5.1: Structure of Original and Current CAS Boards

Original Current

Location GAO OFPP/OMB

Funding Separate appropriation for Board’s No separate appropriation for Board’s

operation. operation. Part of OMB appropriation.

Board Chair: Comptroller General Chair: OFPP Administrator.

membership of the United States.

Membership: One member from Membership: One member each from

a federal agency, one from DOD, GSA, industry, and the

industry, and two from the accounting profession.

accounting profession.

Total: three non-government and Total: two non-government

two government members. and three government members.

Staff Executive Secretary, appointed by Executive Secretary, appointed

Comptroller General, and 25-30 by OFPP Administrator, and

staff members. three staff members.

Location

At the June 1998 public hearings, the Panel received several expressions of

concern regarding the Board’s placement. Some believe the Board’s current

placement in OFPP has led it into procurement policy considerations that are not

appropriate accounting concerns. The Panel heard virtually no support for keeping

the Board in OFPP.

90The Secretary of Defense and the Administrator of GSA appoint the other two members of the current CAS Board.

91Current members include the OFPP Administrator, the Director of DCAA, the Chief Financial Officer of GSA, an industry representative,

and an individual “particularly knowledgeable about cost accounting problems and systems.” The original CAS Board consisted of the

Comptroller General, the DOD Comptroller, two members from the accounting profession, and one industry representative.
48

While the CAS Board is characterized in its authorizing legislation as an

“independent board,” it is subordinate to OFPP and OMB. This affects the ability

of the Board to operate as an independent entity. The Administrator of OFPP is

the Chair of the CAS Board, and with the concurrence of OMB, the Administrator

appoints two of the Board members. OFPP/OMB hires, evaluates, and directs the

Board employees and provides the Board’s funding from OMB’s lump sum

appropriation. As discussed below, because of the CAS Board’s subordination to

OFPP/OMB, constitutional concerns have been raised that its placement and

structure may not allow the Board to issue binding regulations.

In terms of overall policy considerations, the Panel notes that OMB’s and the CAS

Board’s primary missions are significantly different. While the CAS Board

establishes accounting rules for government contractors, OMB provides budgetary

and other support to the President, often within the scope of the deliberative

process and executive privileges.92 To accomplish its primary mission, OMB

evaluates the effectiveness of agency programs, policies, and procedures; assesses

competing funding demands among agencies; and sets funding priorities. OMB

oversees and coordinates the Administration’s procurement, financial management,

information, and regulatory policies. Thus, OMB has a special relationship with

the President that often does not allow for open discussion of preliminary

Administration positions on issues until these positions are finalized.

With respect to OFPP, the Panel views as significant that OFPP’s procurement

policy mission is much broader than the maintenance of the CAS. OFPP provides

high-level direction and leadership of the government procurement system,

whereas the CAS Board’s primary mission is to establish and maintain appropriate

accounting rules for government contractors. The Board’s placement within the

federal government’s primary procurement policy setting organization may have

fostered the perception by some observers, discussed in chapter 4, that procurement

policy considerations may have unduly influenced certain Board pronouncements.

Current CAS Board’s Subordination to OMB/OFPP

Because of the CAS Board’s placement within OFPP and OMB, and since OMB

subjects the Board to its direction, there are concerns about the Board’s

independent authority. Though the Panel found no evidence that OMB has

materially changed any CAS Board rulings, OMB’s review and supervision create

at least the appearance of undercutting the Board’s independence. While the

Board’s authorizing legislation characterizes it as an independent board within

OFPP to promulgate, amend, and rescind standards, all Board pronouncements

92Deliberative process privilege protects pre-decisional opinions, recommendations, and the like from public disclosure before a final decision

has been reached. Pre-decisional materials remain privileged even after the decision to which they pertain is made. Executive privilege

refers to a judicially recognized privilege flowing from the separation of powers doctrine of the Constitution that permits the President to

maintain the confidentiality of official communications with his advisers. The privilege is intended to promote candor in the presidential

deliberation and decision-making process.
49

and actions, including standards and public hearing announcements, must be

approved by OMB, even though the authorizing legislation does not so provide. In

addition, the OFPP Administrator must obtain OMB’s concurrence to appoint

Board members, and conflict of interest waivers for proposed non-government

Board members and staff are approved by OMB.93

Since the CAS Board does not have a separate appropriation, OMB controls the

CAS Board’s funding. As with other OMB components, including OFPP, the

Board’s salaries and expenses are rolled up into the budget for OMB’s lump sum

appropriation. This makes the Board’s operations subject to OMB’s personnel and

budgetary constraints.

The requirement for OMB approval of all CAS Board actions is consistent with the

position taken by the Department of Justice while the legislation authorizing the

CAS Board was pending. At that time, Justice advised Congress that, in order for

the Board to promulgate binding rules, the Board must be subject to the OMB

Director’s, not the OFPP Administrator’s, control. In addition, the Section of Public

Contract Law of the American Bar Association (ABA) has questioned the CAS

Board’s ability to issue binding rules and standards on its own in view of its

subordination to OMB.94 These analyses conclude that the OFPP Administrator,

while appointed by the President and confirmed by Congress, may not be a

“principal officer” of the government but rather an “inferior officer” under the

supervision and direction of the OMB Director, who is a principal officer.95 This

distinction is significant, according to the Public Contract Law Section of the ABA,

because inferior officers or employees may not have the authority to issue binding

regulations; it may be that only principal officers can do so under the Appointments

Clause of the Constitution.96 Thus, it can be argued that neither the Board itself nor

its Chair have the requisite authority to issue binding regulations.97

93Under 18 U.S.C. 208, officers and employees of the United States, including special government employees, are generally prohibited from

participating personally and substantially in rendering advice and rulemaking on matters in which the employee or any organization in which

the employee is serving as an officer has a financial interest, absent a written determination, referred to as a waiver, by the government official

responsible for the appointment that the interest is not so substantial as to be deemed likely to affect the integrity of the services which the

government may expect from such officer or employee.

94See appendix IX.

95The other CAS Board members likewise are not principal officers, but are either inferior officers or employees.

96The Appointments Clause, Article II, section 2, clause 2 of the Constitution provides for the appointment of officers and inferior officers of the

United States. In Buckley v. Valeo, 424 U.S. 1 (1975), the Supreme Court, in considering the constitutionality of the Federal Elections

Commission, discussed the distinction between principal and inferior officers under the Appointments Clause and found that the administrative functions of an executive agency which represent the performance of a significant government duty exercised pursuant to a public law,

such as rulemaking, can be exercised only by principal officers.

97Notwithstanding the arguments regarding the CAS Board’s lack of authority to issue binding regulations, OMB’s approval of CAS Board

promulgations may make the problem moot, even though such approval is not provided for in the CAS Board’s enabling legislation. Also, it

could be argued that the publication of the rules in the FAR may make them binding. See Boeing v. United States, 680 F.2d 132 (Cl.Ct. 1982)

(publication of CAS standards in the government’s procurement regulations makes them binding whether or not their issuance by the CAS

Board, which at that time was located in GAO, was constitutional).
50

OMB Control of the CAS Board’s Staffing and Support

Other concerns regarding the CAS Board’s placement within OFPP and OMB

relate to the control and sufficiency of staff and other support for the CAS Board.

The CAS Board’s enabling legislation permits the Board an Executive Secretary,

two additional senior staff members, and such other staff that the Administrator of

OFPP may appoint.98 In fact, the CAS Board employs four permanent staff: the

Executive Secretary (an attorney with procurement experience); the Director of

Research and a Project Director/Accountant, both of whom are certified public

accountants (CPA); and a Management Analyst, who acts as the Administrative

Officer to the Board. This staff, as well as a fifth staff member (also a CPA), were

employed by OFPP/OMB to work for the Board shortly after it was reestablished.99

Also, at least two employees of other agencies have at times been detailed to the

Board.100 In 1994, GAO reported that the CAS Board may be understaffed, a

problem that did not allow the Board to make progress in resolving important cost

accounting issues.101 The GAO report noted that the original CAS Board employed

25 staff members and that when the CAS Board was reestablished, 7 professional

staff were contemplated by the Board’s staffing plan. The suggestion has been

made, which the Panel finds has merit, that the Board’s staff would be enhanced by

adding individuals with different skills and experience, for example, industry or

contract pricing experience.

Also, since 1997, the Board has not allowed its members, including the industry

representative, to have individual staff support, even if paid by the member’s

organization. Instead, the only staff support is that supplied by the permanent

CAS Board staff, who are supervised by the OFPP Administrator. Until this

change in practice, individual Board members had been allowed to work with

their own support staff. Apparently, OMB is unwilling to be subject to possible

claims that it has waived its privileges concerning the protection of documents in

cases where individuals who are not OMB employees are made privy to the CAS

Board’s internal information.102 OMB apparently is also concerned about possible

conflicts of interest over the use of non-government staff, and is unwilling to

appoint such staff as special government employees, provide funds for them, or

accept volunteer staffing support. At least one observer has stated that since

actions can be taken to ensure that the deliberative process is protected, OMB’s

position regarding the staffing and other support issues is too conservative,

especially given the value to the system of allowing each Board member to utilize

his or her own staff, instead of relying upon the CAS Board’s permanent staff.

9841 U.S.C. 422(b), (c).

99The fifth staff member no longer works for the CAS Board and has not been replaced.

100The Panel understands that OMB has not recently authorized such detailees.

101Cost Accounting Standards Board: Little Progress Made in Resolving Important Issues (GAO/AIMD-94-88, May 25, 1994).

102OMB reportedly directed this change in the CAS Board’s practice after a claimant in an Armed Services Board of Contract Appeals

(ASBCA) litigation requested certain documents from the Board, arguing that the requested documents were no longer protected by the

deliberative process privilege because the CAS Board or its staff had disclosed the documents to persons outside the government. See Gould

Inc., ASBCA No. 46749 (discovery motion to obtain CAS Board records in a claim dispute involving the interpretation of a standard).
51

Moreover, even before 1997, when the Board allowed individual members to have

their own staff, the staff were generally barred from attending Board meetings. In

contrast, the original CAS Board allowed each member to have one staff person

present at Board meetings. Although non-government Board members have

expressed a preference for having staff assist them during meetings and feel that

their representation could be enhanced with such assistance, the Board has barred

all staff, except the permanent CAS Board staff, from attending meetings,

apparently again because OMB believes that the presence of other individuals

from outside government may create a potential conflict of interest or may

constitute a waiver of the deliberative process privilege.

The Panel finds merit in the contention that the Board process would be enhanced

if members were allowed to have their own staff to assist them. Given the

restraints that OMB has imposed on Board members in discussing pending Board

actions with persons not employed by OMB, the Panel believes that, because of the

absence of staff for individual members, legitimate questions have been raised

regarding the fairness and extent of consideration given to the viewpoint of

industry or represented agencies in Board determinations.

Finally, although the CAS Board’s authorizing legislation expressly allows the use of

advisory committees and task forces, the Board has not used advisory committees,

reportedly because such committees would be subject to the Federal Advisory

Committee Act (FACA), which generally requires open access by the public.103

Apparently, this position flows, in part, from OMB’s concern about allowing public

access. The CAS Board has employed informal working groups (not subject to

FACA) to assist on Board projects for the revised disclosure statement and for the

pending cost accounting changes rule; however, one industry participant stated that

because they were prohibited from sharing their work with the rest of the industry,

the industry participants were unable to ensure that the industry’s viewpoint was

adequately presented. In 1994, a GAO report concluded that restricting the use of

advisory committees or task forces when staffing needs exist is likely to further

limit progress in resolving pressing cost accounting issues.104 The report stated that

with clearly defined safeguards concerning conflicts of interest and with limits on

the duration of assignments, detailees, advisory committees, and task forces could be

used to provide the Board with needed assistance.

In light of all of the reasons set out above, the Panel concludes that it would be best to

move the CAS Board out of OFPP/OMB. Although there is logic in placing the Board

within the office handling overall procurement policy, the Panel finds persuasive the

concerns that placement in OFPP/OMB has unduly constrained the Board’s work and

1035 U.S.C. App. 2 § 1. FACA provides that meetings of advisory committees shall be open to the public, that timely notice of each meeting must

be published in the Federal Register, that documents prepared for or by an advisory committee must be accessible for public inspection, and

that minutes of each meeting shall be kept and made available to the public.

104Cost Accounting Standards Board: Little Progress Made in Resolving Important Issues (GAO/AIMD-94-88, May 25, 1994).
52

lent some credence to the contention that the Board’s pronouncements have been

unduly affected by procurement policy considerations. The Panel acknowledges that

although several commentators stated that they believe the reestablished CAS

Board has functioned well and that its pronouncements have been fair and soundly

based, and while recognizing the legitimacy of OMB’s general concerns about

protecting internal discussions and documents, the Panel believes that shifting

the Board out of OFPP/OMB could reinforce its independence. This removal

should facilitate the use of advisory committees, task forces, and staff for

individual members, which would improve the CAS Board process and allow for

greater acceptance of its pronouncements.

Analysis of Alternative CAS Board Structures

Before analyzing possible options for the location, structure, and membership of a

future CAS Board, the Panel believes that it is important to identify the desirable

characteristics of such a Board, irrespective of its placement and membership.

The Panel has identified the following characteristics as necessary:

(1) The CAS Board should be an independent organization not subject to the

control of another agency. In particular, the Board should not be subject to the

control of any other government agency that may have conflicting procurement

policy/funding concerns which could inhibit the Board’s ability to promulgate

standards representing the most appropriate cost accounting practices.

(2) The Board’s members should represent both the government and the private

sector, but government members should remain the majority because the

Board’s underlying purpose is to protect the government’s interests through

the establishment and maintenance of cost accounting standards.

(3) The Board members should serve on a part-time basis. The Board’s workload

has demanded only part-time participation by its members, and the Panel

envisions similar circumstances in the future. Alternatively, the Chair of the

Board could be a full-time employee and perform many of the functions

currently performed by the Executive Secretary.

(4) The Board’s regulations should be binding and take precedence over other

regulations regarding the allocation, measurement, and assignment of costs.

In order to achieve uniformity and consistency in accounting for the costs of

CAS-covered contracts, the accounting rules promulgated by the CAS Board

to establish a framework for contractors to allocate, measure, and assign

costs logically should be given precedence over any other procurement rules

in this area.
53

With these characteristics in mind, the Panel reviewed alternative Board

structures, considering the characteristics of other selected boards and

commissions in an effort to determine a desired structure of the future CAS

Board.105 The requirements for a permanent, independent, and balanced Board

comprised of government and non-government part-time members authorized to

issue binding regulations are rather unique, and the Panel was unable to identify

a comparable structure. However, certain characteristics of the statutory

authority of the Federal Energy Regulatory Commission (FERC), including one

that establishes it as an independent agency, could be adopted to ensure the CAS

Board’s independence if it were placed within a host agency as well as to address

in part the constitutional concerns raised about the present structure.106 These

provisions state:

The Secretary [of Energy] shall provide to the Commission such support and

facilities as the Commission determines it needs to carry out its functions.107

In the performance of their functions, the members, employees, or other

personnel of the Commission shall not be responsible to or subject to the

supervision or direction of any officer, employee, or agent of any other part of

the Department.108

The Panel reviewed the possibility of placing the Board in GAO or making the

Board an advisory committee within a government agency. These options are not

recommended because they would not allow the Board to issue binding

regulations, a characteristic which the Panel has determined necessary. If the

CAS Board were to become an advisory committee, subject to the provisions of

FACA (unless exempted), in order for the Board’s rules and standards to become

legally binding, they would have to be adopted by an individual or organization

authorized to issue binding regulations (such as the OMB Director or the FAR

Secretariat), and such other organizations would have the option of not accepting

the recommendations of an advisory board. The necessity of approval by another

agency would also inhibit the Board’s independence. Moreover, additional

concerns would be raised if the CAS Board were to reside within GAO as an

independent agency because of GAO’s placement within the legislative branch.109

105Appendix XV provides summary information on a number of boards and commissions reviewed by the Panel.

106The presidentially appointed FERC Commissioners are all considered principal officers, in part because FERC’s authorizing

legislation does not subordinate FERC to the Department of Energy.

10742 U.S.C. 7171(c).

10842 U.S.C. 7171(d).

109See Bowsher v. Synar, 478 U.S. 714 (1986) (GAO’s role under the Gramm-Rudman-Hollings Act held to be an executive function, and

given GAO’s placement in the legislative branch, GAO’s role under the Act held to violate the doctrine of separation of powers).
54

RECOMMENDED CHANGES

Recommended CAS Board Locations and Structure

To ensure the CAS Board’s independence and to address the questions raised

regarding its rulemaking authority, changes need to be made to the CAS Board’s

enabling statute. For the reasons addressed above, the Panel recommends that

the CAS Board be removed from OFPP and OMB, and be established as an

independent agency (either within or independent of another executive branch

agency), operating with autonomy.

The Board’s placement must take into consideration its independence and ability

to continue to effectively regulate the standards. Maintaining the Board as a

separate entity independent of any other government agency is key. If the CAS

Board were placed in a host agency, FERC’s enabling legislation would provide a

model to follow to ensure that any agency providing administrative support

would not control or influence the CAS Board’s process or its members and staff,

and to ensure that the regulations issued by the Board would be binding and not

subject to constitutional challenge. The CAS Board should employ its own

permanent staff, who should not be subject to the direction of any other agency,

and should receive a separate appropriation for its operations. Any of the three

alternatives discussed below can, in the Panel’s view, achieve these goals.

GSA: The first option would place the CAS Board within GSA as an independent

agency with separately appropriated funding. As such, the Board would receive

administrative support from GSA, including payroll, personnel, legal, and

accounting functions, and, with an appropriate structure as discussed above,

would not be subject to the control of the host agency. GSA currently provides

government-wide support, including administrative support, to various

committees, boards, and advisory committees.

DOD: The second option would place the CAS Board within DOD as an

independent agency with separately appropriated funding. As with the GSA

option, the advantages of this option would be that it would maximize Board

independence while maintaining a relationship to the host agency (DOD). In

addition, it would place the Board in the agency with the majority of all CAScovered contracts. Placement of the CAS Board in DOD would have some

drawbacks, however, including the possible perception that the agency with the

most at stake in the CAS could unduly influence the promulgation of the CAS for

procurement policy reasons. In this regard, as discussed in chapter 1, DOD

absorbed some of the CAS Board functions between 1980-88, and during that

time a number of conflicts over the standards emerged. On the other hand, the

Panel notes that the ASBCA, which is in DOD, operates with independence.
55

Independent Agency: This option would structure the Board as a totally

independent agency. Given the Board’s relatively small size, and to minimize

costs, support could be provided under a memorandum of understanding with

another agency (such as GSA). The advantages of this model include total

independence in appearance and in reality, whereas disadvantages include

potentially higher costs to the government due to the location of the CAS Board

outside of a host agency.

Recommended Board Membership

The Panel believes that the current qualification criterion for membership should

be retained for the Board members—that is, all members “shall have experience in

government contract cost accounting.” In addition, the Panel believes that the

Chair should be a government officer of high standing appointed by the President.

Other members should include a representative of DOD, which continues to be

responsible for the majority of CAS-covered contracts, and a representative of a

civilian agency. Consistent with the present make-up, there should also be an

industry representative on the CAS Board as well as a member of the accounting

profession (not a government employee) particularly knowledgeable about cost

accounting problems and systems. Moreover, given the Comptroller General’s

independence and particular interest in the CAS, the Panel believes that there is

value in adding the Comptroller General as an ex officio, non-voting member of

the CAS Board. To address the constitutional concerns regarding the Board’s

structure, and because the Panel believes that the CAS Board should be

established in a manner that allows a majority of the Board to promulgate binding

regulations, the Panel also recommends that all members be the subject of

Presidential appointment.110

Recommended Board Staffing

The CAS Board and its Chair should employ permanent staff who would not be

subject to the direction of any other agency. Alternatively, the Chair could be a

full-time employee of the CAS Board, and take on the functions currently

performed by the Executive Secretary and hire and supervise the other Board

staff. The Panel also believes that the Board’s staff would be enhanced by

including individuals with different skill mixes (e.g., individuals with industry or

contract pricing experience). The staff could be augmented when necessary by the

use of detailees from other government agencies. The Board members should also

be permitted their own staff, subject to appropriate safeguards concerning

conflicts of interest. In addition, the Board should employ advisory committees

110 Another possible solution would be for the President to appoint only the Chair of the CAS Board to a non-subordinate position to ensure

principal officer status, and for the other members to be appointed as they are presently. However, if the Chair were the only principal officer

on the Board and were to be outvoted by the other Board members, under the analysis of the Public Contracts Section of the ABA, any

resulting rule may be susceptible to challenge on the basis that it was not issued by a principal officer of the United States—unless the Chair

could be required to carry out the will of the majority of the Board in issuing rules.
56

and task forces to ensure that all necessary and relevant facts and opinions are

fairly and reasonably considered in promulgating or amending standards or other

CAS requirements. Moreover, there should be a mechanism that is not subject to

the control of another agency for reviewing and approving conflict of interest

waivers for individuals employed by the Board—for example, a requirement for

financial disclosure or a process for waiving possible conflicts of interest by the

Chair of the CAS Board.
57

THE CAS BOARD REVIEW PANEL

LIST OF PANEL MEMBERS

Co-Chairs

Dr. Jacques S. Gansler, Under Secretary of Defense for Acquisition and Technology.

Dr. Gansler graduated from Yale University (BE), Northwestern University

(MSIEE), New School for Social Research (MA/Political Economy) and American

University (Ph.D./Economics). He is the author of several books on the defense

industry as well as numerous journal papers, articles, and congressional testimony.

Mr. Nelson F. Gibbs, Vice President and Controller, Northrop Grumman

Corporation. Mr. Gibbs received a BCE from Clarkson University and an MS in

industrial management from Purdue. He is a certified public accountant and a

member of the California Society of Certified Public Accountants and the

Financial Executives Institute.

Mr. James F. Hinchman, Principal Assistant Comptroller General, U. S. General

Accounting Office. Mr. Hinchman received his AB degree from Harvard College and

his JD degree from Harvard Law School. Prior to joining GAO, Mr. Hinchman

worked for 15 years in the executive branch in positions of increasing responsibility.

Panel Members

Mr. Larry L. Grow, Corporate Vice President and Director of Finance, Motorola

Systems Solutions Group. Mr. Grow is a graduate of Arizona State University

(Accounting) and holds an MBA from the University of Chicago.

Mr. Jack M. Hughes. Mr. Hughes has a degree in Economics and Business from

Frostburg State University and completed graduate studies in contract/

procurement law. At BTG, Mr. Hughes provided financial management and

strategic direction and was responsible for contracting and pricing strategies.

Major General Timothy P. Malishenko, USAF, Commander, Defense Contract

Management Command, Defense Logistics Agency (DLA). General Malishenko earned

a bachelor’s degree in business administration from Ohio State University, a master’s in

business from Michigan State University, and a master’s in systems management from

the University of Southern California. At DLA, General Malishenko oversees the

agency’s procurement operations and worldwide contract administration.

Dr. Louis I. Rosen, National Director for Government Contract Services, Ernst &

Young LLP. Mr. Rosen earned a BS in Accounting, an MBA in Management, and a

DBA in Accounting at the University of Maryland. In addition, he received a JD

Appendix I
58

from that university’s School of Law. He is a CPA and a member of the Bar of the

State of Maryland. At Ernst & Young, Dr. Rosen interprets, evaluates, and applies

government regulations to specific contract institutions, including claims

preparation and resolution of disputes.

Mr. Michael J. Thibault, Deputy Director, Defense Contract Audit Agency. Mr.

Thibault has a BA in Accounting from Southern Oregon State College and a Master’s

Degree in Management and Supervision from Central Michigan University. He is a

CPA and an active speaker and panel member of various professional organizations.

Rear Admiral Leonard Vincent, USN, Commandant, Defense Systems

Management College. Admiral Vincent is a graduate of Southeastern State

Teachers College in Oklahoma and received an MBA from the George Washington

University. He is the former Commander of the Defense Contract Administration

Services Region and the Defense Contract Management Command International.

Ms. Karen L. Wilson, Vice President, Government Finance and Process

Excellence, AlliedSignal, Inc. Ms. Wilson earned a BS in Philosophy from College

of William and Mary and a JD in Corporate Law from the American University.

In addition, she received a LLM in Government Contracts from George

Washington University. Ms. Wilson has responsibility for acquisition reform,

government financial management, and business practices. She leads several

joint government/Allied Signal teams to streamline government oversight in

various government accounting, contracting, and procurement areas.
59

POTENTIAL BENEFITS OF THE CAS AS

IDENTIFIED BY THE COMPTROLLER GENERAL IN 1970111

1. Uniform standards supply the guidance, support, and coordination

required to better understand cost estimates and subsequent reports of

actual costs.

2. Standards facilitate the preparation and reporting of cost information by

contractors and its audit and evaluation by the government.

3. Standards provide guidance in helping to ensure that items of costs on a

given contract are reported on a consistent basis and are comparable with

costs originally proposed or projected.

4. Standards provide guidance in helping to ensure that items of cost on a

given contract are reported on a consistent basis with costs in claims for

change orders, reimbursement, price redeterminations, and terminations.

5. Standards require that the basis upon which forecasts of costs are

predicated be disclosed.

6. Standards for use in government procurement operations improve

communications between the government, Congress, industry and the

general public.

7. Standards serve to identify for contractors, the type of authoritative

support for costs incurred that would be required to be accumulated by

them for all contract administration purposes, including audit.

8. Standards establish criteria for the use of alternative methods of cost

accounting or narrow the use of alternatives where criteria for their use

cannot be established.

9. Standards, together with disclosure by the contractor of its cost accounting

practices, promote a common understanding as to the methods of cost

determination to be used consistently under the specific circumstances

and thereby minimize subsequent controversy in the administration and

settlement of the contract.

10. Standards provide underlying criteria for determining when certain

overhead cost allocation methods are appropriate and when they are not.

Appendix II

111Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense Contracts, January 1970.
60

11. Standards eliminate, to a considerable extent, differences within the

government as to interpretations of acceptable cost accounting

practices.

12. Standards increase uniformity between contractors, which provides

increased comparability between bidders on the same contract.

13. Standards increase consistency, thereby providing comparability

between estimated and accumulated costs and safeguards against

windfall or increased profits due to changes in cost accounting practices.
61

THE CAS

The Standards are divided into three categories. Those dealing with (1) overall

cost accounting matters, (2) classes, categories, or elements of cost, and (3) pools of

indirect costs.

Overall cost accounting matters:

CAS 401 - Consistency in Estimating, Accumulating, and Reporting Costs.

Requires that costs estimated in proposals be developed consistently with the

practices used by the contractor in accumulating and reporting costs.

CAS 402 - Consistency in Allocating Costs Incurred for Same Purpose. Requires

that each type of cost be allocated only once and on one basis to any contract.

CAS 405 - Accounting for Unallowable Costs. Requires the identification of

specific costs at the time such costs are determined to be unallowable.

CAS 406 - Cost Accounting Period. Contract costing will be on the basis of the

same fiscal periods for which annual financial statements are prepared.

Classes, categories, or elements of cost:

CAS 404 - Capitalization of Tangible Assets. Establishes the beginning point for

fixed assets accounting.

CAS 407 - Use of Standard Costs for Direct Material and Direct Labor. Provides

guidance for establishment of direct labor and direct material in standard cost systems.

CAS 408 - Accounting for Costs of Compensated Personal Absence. Provides for

the assignment of costs to the proper cost accounting period.

CAS 409 - Depreciation of Tangible Capital Assets. Provides for consistent use of

current methods of depreciation and for reasonable estimates of asset service lives.

CAS 411 - Accounting for Acquisition Costs of Material. Provides criteria for

allocation of cost of a category of material directly to a cost objective and for the

use of inventory costing methods.

CAS 412 - Composition and Measurement of Pension Cost. Guidance for

determining and measuring the components of pension costs and establishing

which costs are to be assigned to a cost accounting period.

Appendix III
62

CAS 413 - Adjustment and Allocation of Pension Cost. Provides guidance for

assignment of pension costs to the cost accounting period and criteria for

allocation among the segments of the organization.

CAS 414 - Cost of Money as an Element of the Cost of Facilities Capital.

Provides technique for measuring and allocating to contracts costs based on

investment in facilities capital.

CAS 415 - Accounting for the Cost of Deferred Compensation. Guidance for the

measurement of the cost of deferred compensation and for the assignment of such

cost to cost accounting periods.

CAS 416 - Accounting for Insurance Costs. Provides criteria for distinguishing

between deposits and earned premiums.

CAS 417 - Cost of Money as an Element of the Cost of Capital Assets Under

Construction. Extension of CAS 414, provides that imputed cost of money be

included in the cost of capital assets.

Pools of Indirect Costs:

CAS 403 - Allocation of Home Office Expenses to Segments. Establishes criteria

for allocation of home office expenses directly to the segments of the organization

to the maximum extent practical.

CAS 410 - Allocation of Business Unit General and Administrative Expenses to

Final Cost Objectives. Provides criteria for the allocation of business unit general

and administrative expenses to contracts and other work.

CAS 418 - Allocation of Direct and Indirect Costs. Requires that costs be

consistently classified as direct or indirect and provides criteria for accumulating

indirect costs into homogeneous indirect cost pools.

CAS 420 - Accounting for Independent Research and Development Costs (IR&D)

and Bid and Proposal (B&P) Costs. Provides criteria for the accumulation and

allocation of IR&D and B&P costs among defense contractor segments.
63

THE CAS EXEMPTIONS

The following categories of contracts and subcontracts are exempt from all the

CAS requirements:

1. Sealed bid contracts.

2. Negotiated contracts and subcontracts not in excess of $500,000.

3. Contracts and subcontracts with small businesses.

4. Contracts and subcontracts with foreign governments or their agents.

5. Contracts and subcontracts in which the price is set by law or regulation.

6. Firm fixed-price and fixed-price with economic price adjustment (provided

that price adjustment is not based on actual costs incurred) contracts and

subcontracts for the acquisition of commercial items.

7. Contracts and subcontracts awarded to a United Kingdom contractor for

performance substantially in the United Kingdom, provided that the

contractor has filed with the United Kingdom Ministry of Defense a

completed Disclosure Statement that adequately describes the contractor’s

cost accounting practices.

8. Subcontracts under the NATO PHM Ship program to be performed outside

the United States by a foreign concern.

9. Contracts and subcontracts to be executed and performed entirely outside the

United States, its territories, and possessions.

10. Firm-fixed-price contracts and subcontracts awarded without submission of

any cost data.

Appendix IV
64

THE CAS APPLICABILITY AND COVERAGE DIAGRAM112

Appendix V

112Defense Contract Audit Manual, January 1999.

Start

Contract/subcontract

meets one of the 

listed CAS exemptions

No

Yes

Contract/subcontract

is exempt from CAS

Business unit received a 

contract/subcontract for $25 million or 

more, or any CAS-covered 

contract/subcontract award thereafter 

in the same year

Business unit recieved $25 million 

or more net CAS-covered 

awardsduring preceding 

accounting periodwith at least 

one exceeding $1 million

Contract/subcontract

is subject to modified

coverage.

Contract/subcontract

is subject to full 

CAS coverage

Business unit 

disclosure 

statement required

Home office allocating 

costs to one or more

disclosing segments 

must submit Part VIII

No disclosure

statement required

Home office allocating

costs to one or more

disclosing segments

must submit Part VIII

Business unit disclosure 

statement required

Business unit CAS-covered awards

during the prior year are less than

$10 million and less than 30 percent

of total sales

Company together with its segments 

received $25 million or more CAS-covered 

awards in most recent accounting 

period with at least one exeeding $1 million

CAS Exemption - 48 CFR 9903.201-1

Negotiated government

contract/subcontract

less than $500,000

Sealed bid contract

Firm-fixed-price

contract/subcontract

awarded without any

cost data

Contract/subcontract

price is set by law

or regulation

Contract/subcontracts

with small business

No

Yes

No

Yes

Yes

No

No

Yes

Contracts/

subcontracts

execuled and 

performed

entirely outside the

United States, its

territories, and its

possessions

Contracts/subcontracts

with foreign 

governments

their agents or

instrumentalities and

except for CAS 401

& 402, Foreign 

Subcontracts under 

the NATO PHM Ship

Programs to be 

performed outside of 

the United States

Firm-fixed-price

contracts/subcontracts 

for the acquisition of

commercial items

Contracts/subcontracts

with United Kingdom

contractors to be

performed substantially

in the United Kingdom,

provided an adequate

disclosure statement

was filed with the

United Kingdom 

Ministry

of Defense
65

Appendix VI

Sample Disclosure Statement Form
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106

COMPARISON OF THE CAS AND FAR COST PRINCIPLES

Adjusting the CAS applicability criteria could result in a larger number of contracts

being exempt from CAS coverage. Generally, these non-CAS-covered, cost-based

contracts would continue to be subject to FAR Part 31 and would still be required to

comply with the three standards concerning deferred compensation and pensions,

since these standards are incorporated by reference into FAR Part 31. In addition,

contractors would still be entitled to recover the cost of money on these non-CAScovered contracts, since the cost of money standards are also incorporated by

reference into FAR Part 31. These non-CAS-covered contracts would also continue to

be subject to the basic concepts embodied in four of the standards, including direct/

indirect charging, segregation of unallowable costs, self-insurance, and B&P/IR&D

costs. By relying on GAAP, these non-CAS-covered contracts would also continue to

be subject to the fundamental concepts embodied in the standards that address

compensated personal absence and purchased insurance.

In addition, non-CAS-covered contracts of any contract type would not be subject to the

specific CAS requirements regarding cost allocations, asset capitalization and

depreciation, cost accounting period, standard costs, and material costs. In addition,

there would be no price adjustments for non-CAS-covered contracts for changes in

accounting practice. Furthermore, the non-CAS-covered fixed-price contracts would not

be subject to price adjustment for failure to comply with the FAR Part 31 requirements.

The following summary compares the CAS with related FAR provisions.

Number of

Comparison attribute standards

Incorporation by reference (CAS 412, 413, 414, 415, 417) 5

Substantial duplication (CAS 402, 405, 416, 420) 4

Reliance on GAAP (CAS 408) 1

Significant differences with FAR providing only general guidelines 8

(CAS 403, 404, 406, 407, 409, 410, 411, 418)

No related FAR Part 31 (CAS 401) 1

The five standards that are incorporated by reference into FAR Part 31 address

deferred compensation, pensions, and cost of money. The four standards that have

FAR Part 31 provisions that duplicate the requirements contained in the standards

address consistency in direct/indirect charging, segregation of unallowable costs, selfinsurance, and IR&D/B&P costs excluding allocation provisions. The eight standards

for which the FAR Part 31 requirements differ significantly address cost allocation,

asset capitalization/depreciation, cost accounting period, standard costs, and material

costs. In addition, CAS 401, which addresses consistency in estimating and

accumulating costs, has no related FAR Part 31 requirement.

Appendix VII
107

The results of the comparison by standard are as follows:

CAS Related FAR provision Results of comparison

401 None No related FAR requirements

402 31.202 and 31.203 Substantial duplication

403 31.201-4 and 31.203 FAR provides only general guidelines

404 31.205-11, 31.205-24, and FAR provides general guidelines/

31.205-52 some duplication

405 31.201-6 Substantial duplication

406 31.203 FAR provides general guidelines

407 31.201-1 FAR provides only general guidelines

408 None Reliance on GAAP

409 31.205-11 and 31.205-16 FAR provides some general

guidelines/some duplication

410 31.201-4 and 31.203 FAR provides only general guidelines

411 31.205-26 FAR provides general guidelines

412 31.205-6(j) Incorporation by reference

413 31.205-6(j) Incorporation by reference

414 31.205-10 Incorporation by reference

415 31.205-6(k) Incorporation by reference

416 31.205-19 Reliance on GAAP for purchased

insurance/incorporates CAS 416

for self-insurance

417 31.205-10 Incorporation by reference

418 31.201-4 and 31.203 FAR provides only general

guidelines

420 31.205-18 Substantial duplication, incorporates

CAS 420 for all provisions except

420.50(e)(2) and (f)(2). Where

differences exist, FAR provides only

general guidelines

COMPARISON OF THE CAS AND FAR PART 31.2

CAS 401: Consistency in Estimating, Accumulating, and Reporting Costs:

The requirements of this standard are not covered in FAR Part 31.2. CAS 401

requires consistency in the estimating, accumulating, and reporting of costs. FAR

Part 31.2 contains no similar or related requirements.
108

CAS 402: Consistency in Allocating Costs Incurred for the Same Purpose:

The requirements of CAS 402 are duplicated in FAR 31.202, “Direct Costs,” and

FAR 31.203, “Indirect Costs.” CAS 402 requires that each type of cost be allocated

only once and on only one basis to each contract. FAR 31.202 and 31.203 provide

the same basic requirements.

CAS 403: Allocation of Home Office Expenses:

The specific requirements of CAS 403 are not addressed. However, general

guidelines on allocation principles are provided at FAR 31.201-4, “Determining

Allocability,” and FAR 31.203, “Indirect Costs.”

CAS 403 establishes criteria for allocating home office expenses to segments. The

standard requires that such allocations be made on a beneficial or causal

relationship. It also provides a hierarchy of allocation practices: (1) direct

identification whenever possible, if not (2) indirect cost pools allocated on a

beneficial or causal relationship, and if that is not possible, (3) allocation of

residual expenses using a three-factor formula.

FAR 31.201-4 states that a cost is allocable if it is assignable or chargeable to one

or more cost objectives on the basis of relative benefits received or other equitable

relationship. Under FAR 31.201-4, a cost is allocable to a government contract if

it (1) is incurred specifically for the contract, (2) benefits both the contract and

other work and can be distributed to them in reasonable proportion to the

benefits received, or (3) is necessary for the overall operation of the business.

FAR 31.203 requires that indirect costs be grouped in logical cost groupings, that

cost groupings be determined so as to distribute costs on the basis of benefits

accruing to cost objectives, that the base for allocating these costs not be

fragmented by removing individual elements, and that the method of allocating

costs be in accordance with GAAP.

CAS 404: Capitalization of Tangible Capital Assets:

For the most part, the specific requirements of this standard are not addressed in

the FAR. However, general guidelines for depreciation are provided at FAR

31.205-11, “Depreciation,” and FAR 31.205-24, “Maintenance and Repair Costs,”

requires that expenditures for plant and equipment be capitalized in accordance

with GAAP.

CAS 404 provides criteria for capitalization. The standard requires capitalization

if the asset benefits more than one period and the cost of the asset exceeds the

minimum capitalization threshold. The standard also includes a “no step-up, no
109

step-down” rule for establishing values of certain assets acquired in a

business combination.

FAR 31.205-11 considers contractor capitalization practices to be reasonable if

the contractor follows policies and procedures that are (1) consistent with those

followed in the same cost center for business other than government, (2) reflected

in the contractor’s books of accounts and financial statements, and (3) both used

and acceptable for federal income tax purposes. In addition, FAR 31.205-11(m)

incorporates CAS 404 for assets acquired under capital leases.

FAR 310.205-24 requires capitalization and depreciation of expenditures for plant

and equipment according to the contractor’s established policy in conformance with

GAAP. In addition, the cost principle requires that extraordinary maintenance and

repair be capitalized and assigned to applicable cost accounting periods.

The cost principle also provides for a “no step-up, no step-down” rule at FAR

31.205-52, which is substantially the same as that provided for under CAS 404.

CAS 405: Accounting for Unallowable Costs:

FAR 31.201-6, “Accounting for unallowable costs,” duplicates the requirements of

CAS 405 through text and incorporation. CAS 405 and FAR 31.201-6 require

contractors to segregate unallowable costs.

CAS 406: Accounting Period:

The requirements of CAS 406 are addressed generally at FAR 31.203.

CAS 406 provides specific criteria on what constitutes an accounting period. The

standard defines the fiscal year as the normal accounting period and provides

specific instances in which a period other than the fiscal year may be used. CAS

406 also provides guidance on the measurement, assignment, and allocation of

restructuring costs.

FAR 31.203, “Indirect Costs,” requires that the base period for allocating indirect

costs be the contractor’s fiscal year but permits use of a shorter period (1) for

contracts in which performance involves only a minor portion of the fiscal year, or

(2) when there is general practice in the industry to use a shorter period.

CAS 407: Use of Standard Costs for Direct Material and Direct Labor:

The specific requirements of this standard are not addressed in the FAR.

However, the concept of standard costs is mentioned at FAR 31.201-1,

“Composition of Total Cost.” FAR Part 31.201-1 includes a general requirement

regarding standard costs, while CAS 407 has detailed criteria.
110

CAS 407 permits use of standard costs if (1) the standard costs are entered into

the books of account, (2) the standard costs and related variances are

appropriately accounted for at the level of the production unit, and (3) the

practices regarding the use of standard costs, revisions to standard costs, and

disposition of variances is stated in writing and consistently followed. In

addition, CAS 407 requires that variances be allocated to cost objectives at least

annually and on the same basis as the standard costs.

FAR 31.201-1 permits the use of standard costs in determining the composition of

total cost if the standard costs are properly adjusted for applicable variances.

CAS 408: Accounting for the Costs of Compensated Personal Absence:

FAR Part 31.2 does not specifically address accounting for the costs of compensated

personal absences and thus relies on GAAP in this area. As noted in the CAS

versus GAAP analysis, the CAS and GAAP have overlap/duplication in this area.

CAS 408 requires costs of personal absences to be assigned to the period in which

they are earned and to be allocated pro-rata to all final cost objectives of that period.

GAAP (Financial Accounting Standards Board (FASB) 43), and thus by default

FAR Part 31.2, requires an employer to accrue a liability for employee’s rights to

receive compensation for future absences when an obligation exists. For example,

GAAP requires a liability to be accrued for vacation benefits that employees have

earned but have not yet taken; however, it generally does not require a liability to

be accrued for future sick pay benefits, holidays, and similar compensated

absences. This requirement is similar to the requirement at CAS 408.

CAS 409: Depreciation of Tangible Capital Assets:

The specific requirements of this standard are not incorporated in the FAR.

However, general guidelines are provided in FAR 31.205-11, “Depreciation.” In

addition, there is duplication in the requirements for treatment of gains or losses

on disposition of assets at FAR 31.205-16, “Gains and Losses on Disposition or

Impairment of Depreciable Property or Capital Assets.”

CAS 409 (1) provides specific criteria for determining when an asset is placed in

use, (2) requires that expected periods of usefulness be used in determining

depreciation periods, (3) requires that the contractor maintain records of past

retirement of similar assets used in similar circumstances, (4) requires that the

records of past retirement be adequate to show the age at retirement for a sample

of assets for each significant category, (5) requires that the depreciation method

used for financial accounting also be used for contract costing (unless the method

is unacceptable for income tax purposes or does not reasonably reflect the

expected consumption of services), (5) limits the direct allocation of costs to those
111

allocated on the basis of usage, and (6) requires that any sale gain/loss be

allocated in the same manner as the asset was depreciated.

FAR 31.205-11 considers contractor depreciation practices to be reasonable if the

contractor follows policies and procedures that are (1) consistent with those

followed in the same cost center for business other than government, (2) reflected

in the contractor’s books of accounts and financial statements, and (3) both used

and acceptable for federal income tax purposes. FAR 31.205-11 also states that

depreciation should usually be allocated as an indirect cost (but there is no

prohibition against allocating deprecation as a direct cost).

In addition, FAR 31.205-16 contains criteria for allocating gains/losses similar to

that contained in CAS 409.

CAS 410: Allocation of Business Unit General and Administrative

Expenses (G&A) to Final Cost Objectives:

The specific requirements of CAS 410 are not addressed in the FAR. However,

general guidelines on allocation principles are provided at FAR 31.201-4,

“Determining Allocability,” and FAR 31.203, “Indirect Costs.”

CAS 410 provides criteria for the allocation of business unit G&A to final cost

objectives based on their beneficial or causal relationship. This standard requires use

of a single business unit G&A pool allocated over a total activity base. The total

activity base can be one of three: total cost input, value added, or single element.

FAR 31.201-4 states that a cost is allocable if it is assignable or chargeable to one

or more cost objectives on the basis of relative benefits received or other equitable

relationship. Under FAR 31.201-4, a cost is allocable to a government contract if

it (1) is incurred specifically for the contract, (2) benefits both the contract and

other work and can be distributed to them in reasonable proportion to the

benefits received, or (3) is necessary for the overall operation of the business.

FAR 31.203 requires that indirect costs be grouped in logical cost groupings, that

cost groupings be determined so as to distribute costs on the basis of benefits

accruing to cost objectives, that the base for allocating these costs not be

fragmented by removing individual elements, and that the method of allocating

costs be in accordance with GAAP.

CAS 411: Accounting for Acquisition Costs of Material:

Most of the specific requirements of CAS 411 are not addressed in the FAR.

However, general guidelines and a few specific requirements are incorporated at

FAR 31.205-26, “Material Costs.”
112

CAS 411 (1) requires consistent contractor policies for accumulating and allocating

material costs, (2) permits direct allocation of material costs to cost objectives if the

cost objective was specifically identified at the time of purchase or production of the

units, (3) states that indirect material not consumed by the end of the period

cannot be charged in that period but must instead be established as an asset, and

(4) provides for five acceptable inventory costing methods: first-in-first-out (FIFO),

moving average, weighted average, standard cost, and last-in-first-out (LIFO).

FAR 31.205-26 states that when materials are purchased solely for and are

identifiable with a contract, the actual purchase cost of those materials shall be

charged directly to that contract. FAR 31.205-26 also states that, for materials

issued from stores, any generally recognized method of pricing such material is

acceptable if that method is consistently applied and the results are equitable.

CAS 412: Composition and Measurement of Pension Costs:

FAR 31.205-6(j), “Pension Costs,” incorporates the requirements of CAS 412 by

reference, and thus the FAR duplicates the CAS for this issue.

CAS 412 and FAR 31.205-6(j) (through incorporation of CAS 412) (1) define the

four components of pension cost for defined benefit pension plans, (2) measure

defined contribution pension plan costs as the net contribution for the period, (3)

require the use of an immediate gain actuarial cost method for measuring defined

benefit pension plan costs other than those accounted for on a pay-as-you-go

method, (4) provide requirements for determining actuarial assumptions/

estimates, and (5) provide criteria for reassignment of pension costs.

CAS 413: Adjustment and Allocation of Pension Costs:

FAR 31.205-6(j), “Pension Costs,” incorporates the requirements of CAS 413 by

reference, and thus the FAR duplicates the CAS for this issue.

CAS 413 and FAR 31.205-6(j) (through incorporation of CAS 412) (1) provide

criteria for computing/assigning gains and losses, (2) provide criteria for actuarial

assumptions, (3) requires allocation of pension costs to all segments having

participants in the pension plan, (4) require segment accounting when certain

conditions exist, (5) provide for the concept of an assignable cost deficit, and (6)

require an adjustment for segment closings and plan terminations.

CAS 414: Cost of Money as an Element of the Cost of Facilities Capital:

FAR 31.205-10, “Cost of money,” incorporates the requirements of CAS 414 by

reference, thus duplicating the CAS for this issue.
113

CAS 414 and FAR 31.205-10 (through incorporation of CAS 414) provide criteria

for the measurement and allocation of the costs of facilities capital.

CAS 415: Accounting for the Cost of Deferred Compensation:

FAR 31.205-6(k), “Deferred compensation,” incorporates the requirements of CAS

415 by reference, and thus the FAR duplicates the CAS for this issue.

CAS 415 and FAR 31.205-6(k) (through incorporation of CAS 415) provide criteria

for measuring and assigning the costs of deferred compensation, including (1)

requirements that deferred compensation be assigned to the period in which the

contractor incurs an obligation to the employee, and (2) that the costs be

measured as the present value of the future benefits.

CAS 416: Accounting for Insurance Costs:

For contractors that establish self-insurance programs, FAR 31.205-19,

“Insurance and Indemnification,” incorporates the requirements of CAS 416, and

thus the FAR duplicates the CAS for this issue. For purchased insurance, CAS

416 and FAR 31.2 (through the use of GAAP) have similar requirements.

For self-insurance charges, CAS 416 (and thus FAR 31.2 for contractors that

establish self-insurance programs) requires that (1) insurance costs be assigned

to a cost accounting period using a projected average loss, and (2) insurance costs

be allocated based on the beneficial and causal relationship between the

insurance costs and the benefiting/causing cost objectives.

For purchased insurance costs, CAS 416 requires that (1) the premium costs

applicable to a given policy term be assigned pro rata among the cost accounting

periods covered by the policy term and (2) a refund become an adjustment to the

pro rata premium costs for the earliest cost accounting period in which the refund

is received. FAR 31.205-19 does not address the treatment of purchased

insurance and thus would follow the GAAP requirements. The GAAP

requirements for the various types of insurance policies that can be purchased are

too numerous to list. However, the general principle that underlies the specific

accounting treatment for each of these policies is similar to the CAS 416

requirement, i.e., the premium cost should be assigned among the accounting

periods covered by the policy term.

CAS 417: Cost of Money as an Element of the Cost of Capital Assets

Under Construction:

FAR 31.205-10, “Cost of money,” incorporates the requirements of CAS 417 by

reference and thus duplicates the CAS for this issue.
114

CAS 417 and FAR 31.205-10 (through incorporation of CAS 417) provide criteria for

measuring the cost of money attributable to capital assets under construction,

including the requirement that the cost of money applicable to investment in

tangible and intangible capital assets being constructed, fabricated, or developed for

a contractor’s own use be included in the capitalized acquisition cost of such assets.

CAS 418: Allocation of Direct and Indirect Costs:

The specific requirements of this standard are not addressed in the FAR. However,

general guidelines on allocation principles are provided at FAR 31.201-4,

“Determining Allocability,” and FAR 31.203, “Indirect Costs.”

CAS 418 requires the contractor to (1) have written policies for classifying costs as

direct or indirect, (2) accumulate the indirect costs in homogeneous cost pools, and (3)

allocate the cost pools in reasonable proportion to the beneficial or causal relationship.

FAR 31.201-4 states that a cost is allocable if it is assignable or chargeable to one

or more cost objectives on the basis of relative benefits received or other equitable

relationship. Under FAR 31.201-4, a cost is allocable to a government contract if

it (1) is incurred specifically for the contract, (2) benefits both the contract and

other work and can be distributed to them in reasonable proportion to the

benefits received, or (3) is necessary for the overall operation of the business.

FAR 31.203 requires that indirect costs be grouped in logical cost groupings, that

cost groupings be determined so as to distribute costs on the basis of benefits

accruing to cost objectives, that the base for allocating these costs not be

fragmented by removing individual elements, and that the method of allocating

costs be in accordance with GAAP.

CAS 420: Accounting for IR&D and B&P Costs:

FAR 31.205-18, “Independent Research and Development and Bid and Proposal

Costs,” incorporates the requirements of CAS 420, except for paragraphs (e)(2)

and (f)(2). Thus the FAR duplicates the CAS by reference for most of this area.

CAS 420 and FAR 31.205-18 (through incorporation of CAS 420) require that

IR&D/B&P costs be (1) accumulated by project, (2) allocated on a beneficial or

causal relationship, and (3) assigned only in the period in which they are incurred

(except that IR&D costs may be assigned to other periods if permitted by existing

laws or regulations).

CAS 420, but not FAR 31.205-18, requires that IR&D/B&P costs be allocated

among segments by means of the same base used by the company to allocate

residual expenses under CAS 403 and that IR&D/B&P costs be allocated to final

cost objectives using the same base used to allocate G&A expenses under CAS 410.
115

FAR 31.2 does not incorporate CAS 403 or CAS 410 and thus relies upon the

general allocability criteria at FAR 31.201-4 for allocating IR&D/B&P costs. This

criteria states that a cost is allocable if it is assignable or chargeable to one or

more cost objectives on the basis of relative benefits received or other equitable

relationship. Under FAR 31.201-4, a cost is allocable to a government contract if

it (1) is incurred specifically for the contract, (2) benefits both the contract and

other work and can be distributed to them in reasonable proportion to the

benefits received, or (3) is necessary for the overall operation of the business.
116

LIST OF SURVEYED CONTRACTORS

AND IDCC FIRMS

Listing of Department of Defense contractors surveyed:

1. Aerojet General Corporation

· GenCorp Aerojet

· Aerojet - Sacramento

2. Alegany Teledyne

· Brown Engineering

· Ryan Aeronautical

· Wahchang Albany

3. Alliant Techsystems

· Commercial Propellent Segment

· Defense Systems

· Space and Strategic Systems Group

4. Allied Signal

· Technical Services

· Electronics and Avionics Systems

· Aerospace Equipment Systems

5. Ball Corporation

· Ball Aerospace and Technical Corporation

6. BDM

· Enterprising Management Systems

· Federal Systems

7. Boeing

· Boeing Commercial Airplanes Group

· Defense & Space Segment

· Aircraft & Missiles Segment

· C-17 Segment

8. Eaton Corporation

· Pressure Sensors Division

· Specific Industry Controls Division

· Valve Actuator Division

Appendix VIII
117

9. General Electric Company · GE Aircraft Engines - Evendale · GE Aircraft Engines - Lynn · GE Power Systems

10. Harris Corporation · Information Systems Division · Government Aerospace Systems Division

11. Honeywell · Honeywell Technology Center

· Solid State Electronics Center

12. L-3 · Explosive Detection System · Medical Systems

13. Lockheed Martin Corporation · LM Tactical Aircraft Systems · LM Aeronautical Systems · LM Missiles and Space · LM Federal Systems

14. Lockheed Martin Sanders · MED · Telecommunications

15. McDermott Incorporated · Naval Nuclear Fuels Division · Nuclear Equipment Division · Contract Research Division

16. Orbital Sciences Corporation · Space Systems Group · Electronic Sensor Systems Group · Launch Systems Group

17. Scott Technologies · Interstate Electronics Corporation · Scott Aviation

18. Sundstrand · Sundstrand Aerospace Electric Systems · Aerospace Mechanical Systems · Aerospace Power Systems
118

19. Textron, Inc.

· Bell Helicopter Textron

· Textron Systems Division

· Fuel Systems Textron

List of IDCC firms:

1. Corning Incorporated

2. Cummins Engine Company

3. Dow Chemical Company

4. Dow Corning Company

5. Eastman Kodak Company

6. Hoechst

7. Honeywell

8. IBM

9. Motorola

10. W. L. Gore and Associates, Inc.

11. 3M Company
119

TESTIMONIES AND OTHER STATEMENTS

PERSON AND ORGANIZATION TOPIC

Ms. Danielle Brian, Executive Director, Government oversight

Project on Government Oversight

Mr. Alan Brown, Attorney, McKenna & Staffing support and

Cuneo communications with industry

Mr. Bert M. Concklin, President, Application of the CAS for the

Professional Services Council service industry

Mr. Tim Foster, President, TAF, Inc. Vital role of the CAS in

government today - with a

historical perspective

Mr. Stanley Fry, Manager of Contracts for The CAS application for

Commercial and Government Systems, predominately

Eastman Kodak commercial companies

Mr. Stephen W. Gammarino, Senior Vice The CAS application for the

President, Federal Employee Program, Blue Cross-Blue Shield Federal

Blue Cross-Blue Shield Association; Employee Program

Mr. Nelson Shapiro, Consultant;

Mr. Bill Preskin, Attorney

Mr. Sanders P. Gerson, Deputy Assistant Application of the CAS to the

Inspector General for Audits, Office of the Federal Employee Health Care

Inspector General, U.S. Office of Personnel Program

Mr. Patrick Gnazzo, Vice President of Corporate perspective of the CAS

Business Practices, and

Mr. Joel Marsh, United Technology

Corporation

Ms. Helaine Gregory, Compliance Officer, The CAS application to Medicare

Government Operations, United contractors

Health Care Insurance Company

Mr. Alfred King, Chairman, Management Management accounting for

Accounting Committee, Institute of government cost accounting

Management Accountants purposes

Appendix IX
120

Mr. Paul Lindahl, Manager, Government The CAS application for

Controllers Department, 3M Corporation predominately commercial

companies

Mr. John Lordon, Vice President for The CAS application for

Business Affairs, Johns Hopkins universities and colleges

University

Mr. Merritt Marquardt, Chairman, Predominately commercial

Integrated Dual-use Commercial Companies companies with small

government market

Mr. Rodney Mateer, National Partner, The CAS and GAAP: overlap,

Deloitte & Touche duplication and conflict

Ms. Eileen Morrissey, Director, Advanced The importance of advanced

Cost Management, AlliedSignal, Inc. cost and management in today’s

Chairperson, Consortium for Advanced complex environment

Manufacturing - International

Mr. Anthony O’Falt, Resident Auditor, Resident DCAA auditor’s

Defense Contract Audit Agency, United perspective on the CAS

Technology Corporation

Mr. Charles Ream, Executive Corporate perspective on the CAS

Vice President for Finance, and

Mr. Robert Morales, Director,

Government Accounting, The Raytheon

Corporation

Mr. William Romenius, Assistant Corporate perspective on the CAS

Comptroller for Finance, The Boeing

Company

Mr. Ronald D. Sabado, Resident Auditor, Resident DCAA auditor’s

Defense Contract Audit Agency, Boeing perspective on the CAS

Corporation Resident Office

Mr. Bernard Sacks, President, Sacks Organizational placement of

Bonuccelli, Inc., Certified Public the CAS

Accountants

Mr. Lynn Saylor, Corporate Director of Corporate perspective on the CAS

Finance, General Electric Company
121

Mr. Charles Tiefer, Associate Professor, Academic perspective on the CAS

University of Baltimore School of Law

Mr. Alan Tinti, Defense Corporate Defense Corporate Executive’s

Executive, Defense Contract Management perspective on the CAS

Command, United Technology Corporation

Mr. Frank D. Titus, Assistant Director for The CAS in the Federal Employee

Insurance Programs, United States Office Health Care Program

of Personnel Management

Ms. Margaret Worthington, Partner, Price The CAS and Cost Principles:

Waterhouse overlap, duplication and conflict

(Statements appear in the order presented)

____________

The following individuals did not appear at the hearing but submitted statements

for the record:

Mr. Bertold Bodenheimer, Partner, Caldwell Need for the CAS

and Bodenheimer, CPA

Mr. Dan C. Heinemeier, President, Applicability of the CAS

Government Electronics and

Information Technology Association

Ms. Eleanor Hill, Inspector General, Need for the CAS

Department of Defense

Mr. Gordon Shillinglaw, Professor of The CAS versus the GAAP

Accounting Emeritus, Columbia University,

and former member of the Cost Accounting

Standards Board

Mr. David A. Churchhill, Need for the CAS

Chair, Section of

Public Contract Laws,

American Bar Association
122

Appendix IX

Testimonies and Other Statements
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
341
342
343
344
345
346
347
348
349
350
351
352
353
354

METHODOLOGY USED TO IDENTIFY

CAS-COVERED CONTRACTS

The federal government does not maintain a database of contracts subject to the

CAS; therefore, the universe of the CAS-covered contracts is not readily available.

The federal government-wide data base for contract actions, FPDS, was used to

determine the amount of cost-based actions; however, it has two major limitations

for the purpose of using it to identify CAS-covered actions. First, the FPDS does

not identify contract actions that are CAS-covered and secondly, it does not collect

contract actions by CAS-covered contractor segments. These limitations

prohibited the use of the FPDS data to determine alternative threshold or trigger

analysis. Therefore, to analyze the impact of alternative CAS applicability

thresholds for individual contracts and for full and modified coverage, the Panel

used a surrogate CAS universe developed by DCAA and DCMC. DCAA obtained

data on the CAS-covered contracts from its defective-pricing database. That

database includes contract awards subject to TINA that are also generally subject

to the CAS. The data was obtained for a single annual period—April 1997 to

March 1998. The defective-pricing universe is created and maintained by each

DCAA Field Audit Office113 and includes negotiated prime contracts, subcontracts,

and modifications where the government required cost or pricing data. The data

source includes the contract and modification numbers, pricing action amount,

and the award or definitization data. Since the CAS are also applicable to

contracts when TINA does not apply, DCAA requested that field offices report

competitively awarded CAS-covered contracts they were aware of and not

included in the defective-pricing universe. Using these two sources of data,

DCAA and DCMC estimated that the CAS universe includes 588 business

segments, totaling approximately $72 billion.

DCAA does not audit each contract action and focuses instead on those contracts

where the financial risk to the government is highest. Thus, the DCAA CAS

universe has limitations because the defective pricing-universe may be

incomplete for low dollar cost-type contracts due to the low risk of defective

pricing. This limitation may cause underreporting of contractors with cost-type

contract awards of less than $100 million and, in turn, affect the analysis

concerning contractors with modified CAS coverage. DCAA’s CAS universe may

also under-report the CAS-covered contracts where certified cost and pricing data

was not obtained and thus may not include CAS-covered firm-fixed-price

contracts when cost data (but not certified cost and pricing data) was obtained.

Appendix X

113DCAA’s field audit offices consist of 18 resident offices and 64 branch offices and are responsible for oversight involving approximately

9,000 active contractors.
355

CAS Coverage Analysis Using Alternative Trigger Concept and Full Coverage Thresholds114

Applicability threshold remains at $500,000 (Dollars in millions)

114Data for under $25 million is probably understated due to use of DCAA Defective Pricing database which may not collect all low dollar costtype contract actions and associated dollars.

Full coverage Trigger = $500 thousands Trigger = $2 million Trigger = $5 million

threshold

Number of Percent of Dollars Percent of

contractors total contract

contractors dollars

$25 Million

 Reductions:

Modified to none 0 0% $0 0% 120 20% $261 0% 219 37% $916 1%

Full to none 0 0% $0 0% 1 0% $29 0% 7 1% $227 0%

Full to modified 0 0% $0 0% 0 0% $0 0% 0 0% $0 0%

 Remaining:

Total Modified 308 52% $2,226 3% 188 32% $1,965 3% 89 15% $1,310 2%

Total Full 280 48% $69,811 97% 279 47% $69,782 97% 273 47% $69,584 96%

Total Coverage 588 100% $72,037 100% 467 79% $71,747 100% 362 62% $70,894 98%

$50 Million

 Reductions:

Modified to none 0 0% $0 0% 120 20% $261 0% 219 37% $916 1%

Full to none 0 0% $0 0% 1 0% $29 0% 7 1% $227 0%

Full to modified 91 15% $3,315 5% 90 15% $3,286 5% 84 14% $3,088 4%

 Remaining:

Total Modified 399 68% $5,541 8% 278 47% $5,251 7% 173 29% $4,398 6%

Total Full 189 32% $66,496 92% 189 32% $66,496 92% 189 32% $66,496 92%

Total Coverage 588 100% $72,037 100% 467 79% $71,747 99% 362 61% $70,894 98%

$75 million

 Reductions:

Modified to none 0 0% $0 0% 120 20% $261 0% 219 37% $916 1%

Full to none 0 0% $0 0% 1 0% $29 0% 7 1% $227 0%

Full to modified 127 22% $5,472 8% 126 21% $5,443 8% 120 20% $5,245 7%

 Remaining:

Total Modified 435 74% $7,698 11% 314 53% $7,408 10% 209 36% $6,555 9%

Total Full 153 26% $64,339 89% 153 26% $64339 89% 153 26% $64,339 89%

Total Coverage 588 100% $72,037 100% 467 79% $71,747 99% 362 62% $70,894 98%

Source: Table based on data provided by DCAA and DCMC

Number of Percent of Dollars Percent of

contractors total contract

contractors dollars

Number of Percent of Dollars Percent of

contractors total contract

contractors dollars
356

Full coverage Trigger = $10 million Trigger = $25 million

threshold

$25 Million

Reductions:

Modified to none 279 47% $1,700 2% 308 52% $2,226 3%

Full to none 30 5% $1,137 2% 88 15% $4,212 6%

Full to modified 0 0% $0 0% 0 0% $0 0%

 Remaining:

Total Modified 29 5% $526 1% 0 0 0 0

Total Full 250 42% $68,674 95% 192 33% $65,599 91%

Total Coverage 279 47% $69,200 96% 192 33% $65,599 91%

$50 Million

 Reductions:

Modified to none 279 47% $1,700 2% 308 52% $2,226 3%

Full to none 30 5% $1,137 2% 88 15% $4,212 6%

Full to modified 65 11% $2,429 3% 29 5% $1,137 2%

 Remaining:

Total Modified 94 16% $2,955 4% 29 5% $1,137 2%

Total Full 185 31% $66,245 92% 163 28% $64,462 89%

Total Coverage 279 47% $69,200 96% 192 33% $65,599 91%

$75 million

 Reductions:

Modified to none 279 47% $1,700 2% 308 52% $2,226 3%

Full to none 30 5% $1,137 2% 88 15% $4,212 6%

Full to modified 97 17% $4,334 6% 51 9% $2,408 3%

 Remaining:

Total Modified 126 21% $4,860 7% 51 9% $2,408 3%

Total Full 153 26% $64,340 89% 141 24% $63,191 88%

Total Coverage 279 47% $69,200 96% 192 33% $65,599 91%

Source: Table based on data provided by DCAA and DCMC.

Number of Percent of Dollars Percent of

contractors total contract

contractors dollars

Number of Percent of Dollars Percent of

contractors total contract

contractors dollars
357

Trigger Contract Analysis - Modified Coverage115

CAS Awards 1 April 1997 - 31 March 1998

Applicability = $500,000 Applicability=$500,000, Applicability=$500,000,

Trigger=$1 million Trigger=$2 million

Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS

contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000)

Modified 308 981 2,225,923 260 913 2,175,216 188 712 1,964,875

Change to 48 68 50,707 120 269 261,048

no CAS

coverage

Percent 16% 7% 2% 39% 27% 12%

changed

to no

coverage

Applicability=$500,000, Applicability=$500,000, Applicability=$500,000,

Trigger=$5 million Trigger=$10 million Trigger=$25 million

Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS

contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000)

Modified 89 324 1,309,560 29 84 526,089 0 0 0

Change to 219 657 916,363 279 897 1,699,834 308 981 2,225,923

no CAS

coverage

Percent 71% 67% 41% 91% 91% 76% 100% 100% 100%

changed

to no

coverage

(Source: DCAA and DCMC.)

115Data for modified coverage is probably understated due to use of defective pricing database which may not collect all low dollar cost-type

contract actions and associated dollar values.
358

Trigger Contract Analysis - Full Coverage

CAS Awards 1 April 1997 - 31 March 1998

Applicability = $500,000 Applicability = $500,000, Applicability=$500,000,

Trigger = $1 million Trigger=$2 million

(dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS

millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000)

$25 No 0 0 0 0 0 0 1 29 28,918

Modified 0 0 0 0 0 0 0 0 0

Full 280 5,915 69,810,682 280 5,915 69,810,682 279 5,886 69,781,764

$30 No 0 0 0 0 0 0 1 29 28,918

Modified 24 216 660,991 24 216 660,991 23 187 632,073

Full 256 5,699 69,149,691 256 5,699 69,149,691 256 5,699 69,149,691

$35 No 0 0 0 0 0 0 1 29 28,918

Modified 43 395 1,283,690 43 395 1,283,690 42 366 1,254,772

Full 237 5,520 68,526,992 237 5,520 68,526,992 237 5,520 68,526,992

$40 No 0 0 0 0 0 0 1 29 28,918

Modified 61 565 1,959,856 61 565 1,959,856 60 536 1,930,938

Full 219 5,350 67,850,826 219 5,350 67,850,826 219 5,350 67,850,826

$45 No 0 0 0 0 0 0 1 29 28,918

Modified 74 776 2,510,741 74 776 2,510,741 73 747 2,481,823

Full 206 5,139 67,299,941 206 5,139 67,299,941 206 5,139 67,299,941

$50 No 0 0 0 0 0 0 1 29 28,918

Modified 91 921 3,314,746 91 921 3,314,746 90 892 3,285,828

Full 189 4,994 66,495,936 189 4,994 66,495,936 189 4,994 66,495,936

$55 No 0 0 0 0 0 0 1 29 28,918

Modified 104 1,014 3,992,253 104 1,014 3,992,253 103 985 3,963,335

Full 176 4,901 65,818,429 176 4,901 65,818,429 176 4,901 65,818,429

$60 No 0 0 0 0 0 0 1 29 28,918

Modified 113 1,091 4,508,720 113 1,091 4,508,720 112 1,062 4,479,802

Full 167 4,824 65,301,962 167 4,824 65,301,962 167 4,824 65,301,962

$65 No 0 0 0 0 0 0 1 29 28,918

Modified 115 1,118 4,631,807 115 1,118 4,631,807 114 1,089 4,602,889

Full 165 4,797 65,178,875 165 4,797 65,178,875 165 4,797 65,178,875

$70 No 0 0 0 0 0 0 1 29 28,918

Modified 121 1,197 5,038,549 121 1,197 5,038,549 120 1,168 5,009,631

Full 159 4,718 64,772,133 159 4,718 64,772,133 159 4,718 64,772,133

$75 No 0 0 0 0 0 0 1 29 28,918

Modified 127 1,317 5,471,776 127 1,317 5,471,776 126 1,288 5,442,858

Full 153 4,598 64,338,906 153 4,598 64,338,906 153 4,598 64,338,906

$80 No 0 0 0 0 0 0 1 29 28,918

Modified 131 1,357 5,780,170 131 1,357 5,780,170 130 1,328 5,751,252

Full 149 4,558 64,030,512 149 4,558 64,030,512 149 4,558 64,030,512

$85 No 0 0 0 0 0 0 1 29 28,918

Modified 137 1,419 6,276,986 137 1,419 6,276,986 136 1,390 6,248,068

Full 143 4,496 63,533,696 143 4,496 63,533,696 143 4,496 63,533,696

$90 No 0 0 0 0 0 0 1 29 28,918

Modified 143 1,502 6,803,240 143 1,502 6,803,240 142 1,473 6,774,322

Full 137 4,413 63,007,442 137 4,413 63,007,442 137 4,413 63,007,442

$95 No 0 0 0 0 0 0 1 29 28,918

Modified 151 1,629 7,546,013 151 1,629 7,546,013 150 1,600 7,517,095

Full 129 4,286 62,264,669 129 4,286 62,264,669 129 4,286 62,264,669

$100 No 0 0 0 0 0 0 1 29 28,918

Modified 159 1,808 8,329,850 159 1,808 8,329,850 158 1,779 8,300,932

Full 121 4,107 61,480,832 121 4,107 61,480,832 121 4,107 61,480,832

(Source: DCAA and DCMC.)

Threshold
359

Trigger Contract Analysis - Full Coverage (continues)

$25 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 0 0 0 0 0 0 0 0 0

Full 273 5,745 69,583,969 250 5,304 68,673,248 192 4,458 65,598,261

$30 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 21 161 576,763 14 70 390,851 4 13 110,439

Full 252 5,584 69,007,206 236 5,234 68,282,397 188 4,445 65,487,822

$35 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 38 291 1,137,922 29 168 885,673 11 27 341,581

Full 235 5,454 68,446,047 221 5,136 67,787,575 181 4,431 65,256,680

$40 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 55 436 1,777,172 42 244 1,381,540 15 39 491,336

Full 218 5,309 67,806,797 208 5,060 67,291,708 177 4,419 65,106,925

$45 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 67 606 2,284,028 50 305 1,718,525 19 59 662,274

Full 206 5,139 67,299,941 200 4,999 66,954,723 173 4,399 64,935,987

$50 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 84 751 3,088,033 65 410 2,429,171 29 111 1,136,602

Full 189 4,994 66,495,936\ 185 4,894 66,244,077 163 4,347 64,461,659

$55 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 97 844 3,765,540 77 488 3,056,364 39 147 1,659,402

Full 176 4,901 65,818,429 173 4,816 65,616,884 153 4,311 63,938,859

$60 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 106 921 4,282,007 85 549 3,514,811 45 176 2,000,696

Full 167 4,824 65,301,962 165 4,755 65,158,437 147 4,282 63,597,565

$65 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 108 948 4,405,094 87 576 3,637,898 46 188 2,063,483

Full 165 4,797 65,178,875 163 4,728 65,035,350 146 4,270 63,534,778

$70 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 114 1,027 4,811,836 93 655 4,044,640 49 199 2,264,357

Full 159 4,718 64,772,133 157 4,649 64,628,608 143 4,259 63,333,904

$75 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 120 1,147 5,245,063 97 706 4,334,342 51 211 2,408,361

Full 153 4,598 64,338,906 153 4,598 64,338,906 141 4,247 63,189,900

$80 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 124 1,187 5,553,457 101 746 4,642,736 54 224 2,639,349

Full 149 4,558 64,030,512 149 4,558 64,030,512 138 4,234 62,958,912

$85 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 130 1,249 6,050,273 107 808 5,139,552 60 286 3,136,165

Full 143 4,496 63,533,696 143 4,496 63,533,696 132 4,172 62,462,096

$90 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 136 1,332 6,576,527 113 891 5,665,806 64 324 3,490,676

Full 137 4,413 63,007,442 137 4,413 63,007,442 128 4,134 62,107,585

$95 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 144 1,459 7,319,300 121 1,018 6,408,579 70 370 4,046,990

Full 129 4,286 62,264,669 129 4,286 62,264,669 122 4,088 61,551,271

$100 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421

Modified 152 1,638 8,103,137 129 1,197 7,192,416 74 428 4,436,639

Full 121 4,107 61,480,832 121 4,107 61,480,832 118 4,030 61,161,622

(Source: DCAA and DCMC.)

Applicability = $500,000 Applicability = $500,000, Applicability=$500,000,

Trigger = $5 million Trigger=$10 million Trigger=$25 million

(dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS

millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000)

Threshold
360

Applicability = $500,000 Applicability = $500,000, Applicability=$500,000,

Trigger = $1 million Trigger=$2 million

(dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS

millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000)

Trigger Contract Analysis - Full Coverage (continues)

$25 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 0% 0% 0% 0% 0% 0% 0% 0% 0%

Full 100% 99% 100% 100% 99% 100% 100% 99% 100%

$30 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 9% 4% 1% 9% 4% 1% 8% 3% 1%

Full 91% 96% 99% 91% 96% 99% 91% 96% 99%

$35 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 15% 7% 2% 15% 7% 2% 15% 6% 2%

Full 85% 93% 8% 85% 93% 98% 85% 93% 98%

$40 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 22% 9% 3% 22% 9% 3% 21% 9% 3%

Full 78% 90% 97% 78% 90% 97% 78% 90% 97%

$45 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 26% 13% 4% 26% 13% 4% 26% 13% 4%

Full 74% 86% 96% 74% 86% 96% 74% 86% 96%

$50 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 33% 15% 5% 33% 15% 5% 32% 15% 5%

Full 68% 84% 95% 68% 84% 95% 68% 84% 95%

$55 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 37% 17% 6% 37% 17% 6% 37% 17% 6%

Full 63% 82% 94% 63% 82% 94% 63% 82% 94%

$60 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 40% 18% 6% 40% 18% 6% 40% 18% 6%

Full 60% 81% 93% 60% 81% 93% 60% 81% 93%

$65 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 41% 19% 7% 41% 19% 7% 41% 18% 7%

Full 59% 81% 93% 59% 81% 93% 59% 81% 93%

$70 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 43% 20% 7% 43% 20% 7% 43% 20% 7%

Full 57% 79% 93% 57% 79% 93% 57% 79% 93%

$75 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 45% 22% 8% 45% 22% 8% 45% 22% 8%

Full 55% 77% 92% 55% 77% 92% 55% 77% 92%

$80 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 47% 23% 8% 47% 23% 8% 46% 22% 8%

Full 53% 77% 92% 53% 77% 92% 53% 77% 92%

$85 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 49% 24% 9% 49% 24% 9% 49% 23% 9%

Full 51% 76% 91% 51% 76% 91% 51% 76% 91%

$90 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 51% 25% 10% 51% 25% 10% 51% 25% 10%

Full 49% 74% 90% 49% 74% 90% 49% 74% 90%

$95 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 54% 27% 11% 54% 27% 11% 54% 27% 11%

Full 46% 72% 89% 46% 72% 89% 46% 72% 89%

$100 No 0% 0% 0% 0% 0% 0% 0% 0% 0%

Modified 57% 30% 12% 57% 30% 12% 56% 30% 12%

Full 43% 69% 88% 43% 69% 88% 43% 69% 88%

(Source: DCAA and DCMC.)

Threshold
361

Trigger Contract Analysis - Full Coverage (continues)

$25 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 0% 0% 0% 0% 0% 0% 0% 0% 0%

Full 98% 97% 100% 89% 89% 98% 69% 75% 94%

$30 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 8% 3% 1% 5% 1% 1% 1% 0% 0%

Full 90% 94% 99% 84% 88% 98% 67% 75% 94%

$35 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 14% 5% 2% 10% 3% 1% 4% 0% 0%

Full 84% 92% 98% 79% 86% 97% 65% 74% 93%

$40 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 20% 7% 3% 15% 4% 2% 5% 1% 1%

Full 78% 89% 97% 74% 85% 96% 63% 74% 93%

$45 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 24% 10% 3% 18% 5% 2% 7% 1% 1%

Full 74% 86% 96% 71% 84% 96% 62% 74% 93%

$50 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 30% 13% 4% 23% 7% 3% 10% 2% 2%

Full 68% 84% 95% 66% 82% 95% 58% 73% 92%

$55 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 35% 14% 5% 28% 8% 4% 14% 2% 2%

Full 63% 82% 94% 62% 81% 94% 55% 72% 92%

$60 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 38% 15% 6% 30% 9% 5% 16% 3% 3%

Full 60% 81% 93% 59% 80% 93% 53% 72% 91%

$65 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 39% 16% 6% 31% 10% 5% 16% 3% 3%

Full 59% 81% 93% 58% 79% 93% 52% 72% 91%

$70 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 41% 17% 7% 33% 11% 6% 18% 3% 3%

Full 57% 79% 93% 56% 78% 93% 51% 72% 91%

$75 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 43% 19% 8% 35% 12% 6% 18% 4% 3%

Full 55% 77% 92% 55% 77% 92% 50% 71% 90%

$80 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 44% 20% 8% 36% 13% 7% 19% 4% 4%

Full 53% 77% 92% 53% 77% 92% 49% 71% 90%

$85 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 46% 21% 9% 38% 14% 7% 21% 5% 4%

Full 51% 76% 91% 51% 76% 91% 47% 70% 89%

$90 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 49% 22% 9% 40% 15% 8% 23% 5% 5%

Full 49% 74% 90% 49% 74% 90% 46% 70% 89%

$95 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 51% 25% 10% 43% 17% 9% 25% 6% 6%

Full 46% 72% 89% 46% 72% 89% 44% 69% 88%

$100 No 3% 3% 0% 11% 10% 2% 31% 24% 6%

Modified 54% 28% 12% 46% 20% 10% 26% 7% 6%

Full 43% 69% 88% 43% 69% 88% 42% 68% 88%

 (Source: DCAA and DCMC.)

Applicability = $500,000 Applicability = $500,000, Applicability=$500,000,

Trigger = $5 million Trigger=$10 million Trigger=$25 million

(dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS

millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000)

Threshold
362

FULL VERSUS MODIFIED COVERAGE RISKS

Full CAS coverage requires compliance with all 19 standards, while modified CAS

coverage requires compliance with only four. Thus, there are 15 standards that

apply to full but not to modified coverage. As a result, there is an inherent risk

associated with contractors that move from full to modified coverage.

For contracts that are not covered by FAR Part 31 (e.g., fixed-price contracts), the

risk to the government would be its loss of the right to a contract price

adjustment due to contractor’s failure to comply with the requirements contained

in these 15 standards. To the extent that FAR Part 31 incorporates the CAS, costreimbursement contracts continue to be subject to the referenced standards.

The 15 standards that apply to full but not to modified coverage concern a myriad

of subjects, including cost allocation, capitalization and depreciation, standard

costs, materials, pensions, cost of money, deferred compensation, insurance, and

B&P, and IR&D. FAR Part 31 incorporates by reference 5 of these 15 standards

(including standards concerning deferred compensation, pensions, and cost of

money) and duplicates another 4 (including standards concerning consistency in

allocating costs incurred for the same purpose, unallowable costs, self-insurance,

and IR&D costs and B&P costs excluding allocation provisions). Thus, for

contracts covered by FAR Part 31, the risk is mitigated to the extent that these

CAS provisions are incorporated into the FAR. However, additional risk would

exist for the other 6 standards, and for the parts of the 4 standards that are not

duplicated in the FAR.

The CAS include 4 standards that address in detail cost allocation requirements

(CAS 403, 410, 418, and 420). Conversely, FAR Part 31 does not include the

detailed cost allocation requirements contained in these 4 standards. Instead, the

FAR contains a broad based cost allocation rule that has not markedly changed

since 1959. For these 4 standards, the risk to the government may be higher to

the extent that broader based allocation requirements could allow an increase in

inequitable cost allocations to government contracts.

The CAS also include 2 standards that address accounting for tangible capital

assets (CAS 404 and CAS 409). These standards include detailed requirements

regarding when to capitalize an asset, how long its useful life will be, and what

method of depreciation will be used. While FAR Part 31 also addresses the

accounting for tangible capital assets, it provides general criteria. Under FAR

Part 31, depreciation costs are generally deemed to be reasonable if they are the

same as those used in non-government segments, are the same as those included

in the contractor’s records and financial statements, and are the same as those

used for tax purposes. Thus, the FAR permits more flexibility in asset cost

assignment between accounting periods. The risk related to this particular

standard exists to the extent contractors may move costs between accounting

 Appendix XI
363

periods and use this movement as a means of redistributing costs between

contracts (due to variations in government cost-type contract participation

between accounting periods).

CAS 407 contains detailed requirements for use of standard costs, while FAR Part

31 provides general criteria. CAS 407 requires that (1) the standard costs be

entered into the books of account, (2) the standard costs and related variances be

appropriately accounted for at the level of the production unit, (3) the practices

regarding the use of standard costs be stated in writing and consistently followed,

and (4) standard cost variances be allocated to contracts at least annually and on

the same basis as the standard costs. FAR 31.201-1 has a broader based

requirement that requires that standard costs be properly adjusted for applicable

variances. The increased risk related to this standard exists to the extent

contractors may use the broader FAR criteria to reallocate costs between costtype government contracts and all other contracts. Such cost reallocation could

result from allocating variances less frequently than annually or from not

allocating variances on the same basis as the standard costs are allocated. In

addition, without the written practices required by the standard, it would be

more difficult for the government to cite a contractor for noncompliance with

disclosed practices.

While CAS 411 and FAR Part 31 both contain accounting requirements for

material costs, the CAS 411 requirements are significantly more detailed. CAS 411

(1) requires consistent contractor policies for accumulating and allocating material

costs, (2) permits direct allocation of material cost to cost objectives if the cost

objective was specifically identified at the time of purchase or production of the

units, (3) states that indirect material not consumed by the end of the period

cannot be charged in that period but instead must be established as an asset, and

(4) provides five acceptable inventory costing methods (FIFO, moving average,

weighted average, standard cost, and LIFO). FAR 31.205-26 requires that

materials purchased solely for and identifiable to a contract be charged directly to

that contract and that the inventory method used be a generally recognized method

that is consistently applied and has equitable results. The increased risk related to

this standard exists to the extent contractors may use the broader FAR criteria to

reallocate costs between cost-type government contracts and all other contracts.

This could result from using an inventory method that is not recognized by the

CAS or by charging indirect material that is not consumed by the end of the period

to a contract or contracts. In addition, without the written practices required by

the standard, it would be more difficult for the government to cite a contractor for

noncompliance with disclosed practices.
364

 Agency Requests

(1) Waiver for the N/A 2/14/91 2/21/91 N/A 8 N/A

purchase of classified

chips from a company

that was reluctant to do

business with the

government (DOD)

(2) Waiver for the N/A 9/24/98 10/5/98 N/A 60 N/A

application of the CAS

to health insurance

carriers under the

Federal Employee

Health Benefits

Program (OPM)

(3) Waiver from the N/A 1/10/91 4/8/91 N/A 88 N/A

period cost assignment 1/10/91 4/10/91

provisions of the CAS

412.40(c) (DOD)

(4) Authority for DOD N/A 11/14/97 6/15/98 N/A 212 N/A

to grant certain CAS

waivers for firm-fixed

price contracts when

cost or pricing

information is provided

by the prospective

contractor (DOD)

(5) Exemption from the N/A 8/20/92 4/26/93 N/A 246 N/A

requirements of the CAS

for DOD commercial

item acquisitions (DOD)

Company Requests

(6) Segment accounting 8/17/95 8/28/95 9/12/95 12 14 26

requirements of CAS

413 re: the proposed

merger of three defined

benefit pension plans

(DOD)

ANALYSIS OF THE CAS BOARD WAIVER REQUESTS

Company

request

(Col A)

Agency

request

(Col B)

Date of Days from

Company

request to

Agency

submission

(Col A - Col B)

Agency

submission to

the CAS

Board decision

(Col B - Col C)

Company

request to the

CAS Board

decision

(Col A - Col C)

The CAS

Board

decision

(Col C)

Subject of request

(requesting agency) Remarks

The original request was made by

the National Security Agency on

2/6/91. DOD needed the chips for

Operation Desert Storm.

The Omnibus Appropriations Act

for 1999 stated that the CAS

would not apply to the Federal

Employee Health Benefits

Program. OPM officials state that

this “exemption” is a “waiver”

because appropriation law applies

for only one year.

When the CAS Board was

reestablished in 1988, DOD

requested the review of five open

cases. Also, DOD requested

waiver authority for the CAS

requirements, when appropriate,

on an individual contract basis.

The CAS Board focused on issues

regarding CAS 412.

The acting CAS Board Chairman

referred the request to the CAS

Board staff on 2/13/98. The waiver

was limited to a 2-year period

subject to four limitations.

Denied. On 12/23/92, DCAA

supported a DOD 12/3/92 modified

request. A CAS exemption was

published on 11/4/93.

The CAS Board conducted a

detailed analysis of the waiver

request. Based on this analysis, it

placed a number of conditions on

the approved waiver.

 Appendix XII
365

(7) Waiver of segment 9/26/96 11/25/96 12/5/96 59 11 70

accounting

requirements of CAS

413 for a large defense

merger of two

companies (DOD)

(8) Partial waiver 6/6/98 7/14/98 8/19/98 39 35 74

request re: a

contractor’s financial

liability if a

subcontractor fails to

comply with the CAS

(NASA)

(9) The CAS 2/19/92 3/12/93 6/14/93 24 92 116

requirements for all

DOD contracts awarded

to a contractor for a

specific 5-year period

of time to acquire

needed chemicals

(DOD)

(10) The CAS 11/2/92 2/1/93 3/4/93 90 33 123

requirements with

respect to a proposed

subcontract

(Department of Energy

(DOE))

(11) The CAS 5/17/93 9/17/93 10/8/93 120 22 142

requirements for an

urgent subcontract

needed by a company

to support the Navy’s

Trident II Missile

Program (DOD)

(12) The CAS coverage 8/10/90 3/18/91 3/19/91 218 1 219

of three subcontractors

supporting Navy’s

Trident II (DOD)

(13) The CAS coverage 1/8/91 9/20/91 10/10/91 253 20 273

of one contractor

supporting the Navy’s

Trident II (DOD)

Company

request

(Col A)

Agency

request

(Col B)

Date of Days from

Company

request to

Agency

submission

(Col A - Col B)

Agency

submission to

the CAS

Board decision

(Col B - Col C)

Company

request to the

CAS Board

decision

(Col A - Col C)

The CAS

Board

decision

(Col C)

Subject of request

(requesting agency) Remarks

While the CAS Board approved the

waiver request, approval was made

contingent on certain conditions

pertaining to accounting for period

costs and traceability.

After a university submitted its

letter on 6/6/98, the NASA

Resident Office submitted its letter

to NASA Headquarters on 6/10/98.

Denied. The CAS Board did not

believe that the contract required

the incorporation of the CAS

clause because anticipated

purchases did not meet threshold

requirements.

DOE’s Oak Ridge Field Office’s

letter of 1/14/93 provided a

comprehensive explanation

justifying the waiver.

The CAS Board approved the

request. However, the Board

expressed concerns over competitive sources, basis for contractual

refusal, and other issues.

This request was also based on

letters sent 12/21/90 and 1/11/91

from the Navy’s Director, Strategic

Systems Program. The Navy made

its request to DOD on 2/28/91.

After receiving the contractor’s

letter, the Navy’s Director,

Strategic Systems Program, sent

his request to DOD on 3/8/91.
366

(14) Partial waiver 2/18/93 9/21/93 11/26/93 213 65 278

request re: a

contractor’s financial

liability if a

subcontractor fails to

comply with the

CAS (NASA)

Note: N/A = Not applicable.

Company

request

(Col A)

Agency

request

(Col B)

Date of Days from

Company

request to

Agency

submission

(Col A - Col B)

Agency

submission to

the CAS

Board decision

(Col B - Col C)

Company

request to the

CAS Board

decision

(Col A - Col C)

The CAS

Board

decision

(Col C)

Subject of request

(requesting agency) Remarks

While a university submitted its

letter on 2/18/93, the NASA

Resident Office did not submit its

letter to NASA Headquarters until

9/16/93.
367

COMPARISON OF

THE CAS AND GAAP

SIMILARITIES BETWEEN THE CAS AND GAAP

The meaning of the term GAAP has varied over time. Originally, GAAP referred

to accounting policies and procedures that were widely used in practice. As

standards setting bodies and professional organizations increasingly became

involved in recording practices and recommending preferred practices, the term

came to refer to the pronouncements issued by particular accounting bodies such

as the Committee on Accounting Procedure and the Accounting Principles Board

(APB), both committees of the American Institute of Certified Public Accountants

(AICPA), and more recently the FASB. Today, many different series of

authoritative literature exist, some are still in effect but are no longer being

issued, like APB Opinions and the AICPA Accounting Research Bulletins (ARB).

Others—such as FASB Statements and Interpretations—continue to be issued by

accounting organizations.

To better organize and make clear what is meant by GAAP, the accounting

community established what is commonly referred to as the GAAP hierarchy. The

purpose of the hierarchy is to instruct financial statement preparers, auditors,

and users of financial statements concerning the relative priority of the different

sources of GAAP used by auditors to judge the fairness of presentation of

financial statements. The following displays the four levels of established

principles that are supported by authoritative literature as well as additional

sources of GAAP.

Hierarchy of GAAP

Level A-

· Financial Accounting Standards (FAS)

· FASB Interpretations

· APB Opinions

· ARB

Level B-

· FASB Technical Bulletins (FTB)

· AICPA Industry Audit and Accounting guides

· AICPA Statements of Position

Level C-

· Consensus Positions of the Emerging Issues Task Force (EITF)

· AICPA Practice Bulletins

Appendix XIII
368

Level D-

· AICPA Accounting Interpretations

· FASB Implementation Guides

Other accounting literature

· FASB Concepts Statements

· APB Statements

· AICPA Issue Papers

· International Accounting Standards Committee Statements

· GASB Statements, Interpretations, and Technical Bulletins

· Pronouncements of other professional associations and regulatory bodies

· AICPA Technical Practice Aids

· Accounting textbooks, handbooks, and articles

Five of the 19 standards (CAS 401, 407, 408, 411, 417) do not significantly differ

from GAAP.

The Related

CAS GAAP Observation

401 FASB Concept

Statement 2,

APS 4 and

APB 20

407 ARB 43

408 FASB 43

411 ARB 43

417 FASB 34

The CAS address consistency between estimating and accumulating contract

costs. GAAP address consistency in reporting financial performance between

periods. CAS are concerned with consistency in proposing and recording

contract costs, while GAAP are concerned with consistency in reporting

financial performance.

For financial accounting purposes, GAAP contain a footnote with regard to the

use of standard costs. The CAS Board did not believe that this was sufficient

for contract costing purposes.

FASB 43 and CAS 408 are substantially the same. CAS 408 has not been

reviewed to determine if and how FASB 43 could be used to streamline the

standard.

Both CAS 411 and GAAP provide criteria for acceptable inventory costing

methods but the GAAP criteria are general while the CAS list specific costing

methods that may be used.

GAAP require the capitalization of actual interest costs incurred with the

construction of capital assets, while the CAS require the capitalization of an

imputed cost of money value.
369

DIFFERENCES BETWEEN THE CAS AND GAAP

Eight of the 19 standards (CAS 404, 406, 409, 412, 413, 415, 416, and 420) differ

from related GAAP requirements as shown below:

The Related

CAS GAAP Observation

404 FASB Concept

Statement 6,

APB 16

406 APB

Statement 4

EITF 94-3

EITF 95-3

409 APB Statement 4

APB 16

412 FASB 87

413 FASB 87and 88

415 Numerous

416 FASB 5

FAS 106

420 FAS 2

GAAP permit step-up/step-down of assets while the CAS do not. The CAS Board

believed that the government should share in gains or losses subsequent to asset

revaluation but developing equitable procedures would be complex and costly.

Therefore, the Board concluded that the most acceptable solution would be to retain

the original asset acquisition cost as a base for calculating contract costs.

The CAS provide specific instances in which a period other than the fiscal year may

be used, while GAAP do not provide specific instances in which a period other than

one year may or may not be used as an accounting period. For assignment of

restructuring costs to accounting periods, the CAS provide flexibility to expense or

defer such costs, while GAAP require certain restructuring costs to be expensed in

the current period.

GAAP permit step-up/step-down of assets while the CAS do not. The CAS Board

believed that the government should share in gains or losses subsequent to asset

revaluation but developing equitable procedures would be complex and costly.

Therefore, the Board concluded that the most acceptable solution would be to retain

the original asset acquisition cost as a base for calculating contract costs.

The CAS require funding of the pension liability while GAAP do not. The CAS

Board included a funding requirement to allocate pension costs to the current

period. The Board determined that it was necessary to link the period assignment

of costs to current period funding to ensure the verifiability of the accrued amounts.

This was due to the magnitude of the liability and the extended delay between the

accrual of the cost and the settlement of the liability.

The CAS address final accounting for segment closings, while GAAP do not. The CAS

require that actuarial gains and losses using an immediate-gain actuarial cost

method be amortized over 15 years, while GAAP require immediate recognition of

certain actuarial gains and losses and different amortization requirements for others.

A substantial amount of GAAP were formulated after the CAS were issued (e.g., postretirement benefits); other GAAP were formulated before the CAS promulgation but

have changed significantly since the CAS were promulgated (e.g., employee stock

ownership plans and stock based compensation).

The CAS recognize self-insurance while GAAP do not. The CAS Board staff decided

to depart from the GAAP because government procurement regulations in existence

at the time the CAS Board was debating this issue already allowed a charge for selfinsurance. In addition, the CAS require funding for retiree insurance benefits to

measure insurance cost in a particular cost accounting period. This conflicts with

GAAP, which do not include a requirement. The original CAS Board believed that if

the contractor wished to recognize a cost in the current period when the actual

payment would not take place until an indefinite time in the future, such an

obligation should be evidenced by funding.

GAAP do not permit assignment of IR&D costs to future periods; the CAS permit

assignment of IR&D costs to future periods but only if specifically permitted by

procurement regulations. The CAS Board stated that FAS 2 was not determinative

for contract costing and pricing purposes. The Board stated that it would undertake

research on a project to determine the feasibility of a standard for the accounting

treatment of deferred development costs. In the interim, the Board wrote the

standard so that the procurement agencies could continue to use their existing

procurement rules for assigning IR&D costs to accounting periods.
370

DOD’s COST-BASED CONTRACTING

Note: Negotiated cost based awards include cost type contracts, flexible-price fixed type contracts and firm fixed-type contracts, where

certified cost and pricing data was obtained or progress payment were made based on incurred costs. Negotiated cost-based awards do not

include non-negotiated awards, firm fixed priced awards where certified cost and pricing data was not obtained, or where progress payments

were not made.

Appendix XIV

0

10

20

30

40

50

60

70

80

90

100

1977 1982 1987 1992 1997

In percent

Fiscal year

Dollars

Actions
371

SUMMARY INFORMATION ON SELECTED BOARDS

Appendix XV

Board/

Commissions Principal characteristics

FASB

Government

Accounting

Standards Board

Federal

Accounting

Standards

Advisory Board

FERC

ASBCA

Railroad

Accounting

Principles Board

(RAPB)

Surface

Transportation

Board (STB)

Federal

Retirement Thrift

Investment Board

The Board consists of seven members appointed by the Financial Accounting Foundation for 5-year

terms, who are eligible for reappointment to one additional 5-year term. Members serve full-time

and are required to sever all connections with the firms or institutions they served prior to joining

the Board. The Board is assisted by a staff of about 40 professionals from public accounting,

industry, academia, and government, plus support personnel. This is a not a government agency.

The Board consists of seven members appointed by the Financial Accounting Foundation. The

Chairman serves full-time; other members serve on a part-time basis and may be in the employ of

other organizations. The Board is assisted by a staff of about 10 professionals from public accounting, academia, and government, plus support personnel. This is not a government agency.

Established in 1990 by the Secretary of the Treasury, the Director of OMB, and the Comptroller

General (known as the principals), the Board is an advisory committee recommending accounting

standards to the principals to promulgate. The Board is comprised of nine part-time members

selected from government entities and the private sector. Treasury, OMB, GAO, and CBO select

their own members. The principals select the remaining five members. The principals select the

Board’s Chairperson from among the three non-federal members.

An independent regulatory commission within DOE, the Commission is composed of five members

appointed by the President for a term of 5 years, who can be removed only by the President. All of

the members are considered principal officers. Members may not engage in any other business,

vocation, or employment while serving on the Commission. In the performance of their functions,

the members, employees, or other personnel of the Commission may not be responsible to or

subject to the supervision or direction of any officer, employee, or agent of any other part of the

Department. In each annual authorization and appropriation request, the Secretary of Energy

identifies the portion thereof intended for the support of the Commission and includes a statement

by the Commission showing the amount requested by it.

The ASBCA is an independent tribunal to hear and decide contract disputes between government

contractors and DOD. The Board consists of attorneys who have been qualified in the manner

prescribed by the Contract Disputes Act of 1978. The Under Secretary of Defense (Research and

Engineering) and the Assistant Secretaries of the Military Departments responsible for procurement appoint the Chairman and Vice-chairman and other members of the Board. The Department

of the Army provides administrative support to the Board. The Departments of the Army, the

Navy, the Air Force, and the Office of the Secretary of Defense share the Board’s cost on an equal

basis and to the extent determined by the Assistant Secretary of Defense (Comptroller).

Established in 1980 as part of the legislative branch, Congress charged the Board with developing

a set of cost accounting principles for rail carriers subject to the jurisdiction of the Interstate

Commerce Commission (ICC). The Board had seven members (five non-government and two

government) and was chaired by the Comptroller General. The Board’s authorizing legislation

called for the Board to cease to exist 3 years after its effective date and for the accounting

principles it developed to be adopted by ICC. The principles adopted by the ICC are still binding

on all carriers.

An independent agency administratively housed within the Department of Transportation, the

Board is responsible for the economic regulation of interstate surface transportation to ensure that

competitive and efficient transportation services are provided to meet the needs of shippers,

receivers, and consumers. Created in 1996 as a successor agency to the ICC, the STB ensures that

the cost accounting principles developed by RAPB are followed. The STB is an independent,

bipartisan, adjudicatory body. It consists of three members appointed by the President with the

advice and consent of the Senate for 5-year terms. The President designates the Board’s Chairman from among the members.

The Board was established as an independent agency by the Federal Employees’ Retirement

System Act of 1986, 5 U.S.C. 8472, and is composed of five members. Three are appointed by the

President, who designates one of them the Chairman. The other two members are also appointed

by the President: one taking into consideration the recommendation made by the majority leader

of the Senate, and the other taking into consideration the views of the Speaker of the House. The

Board establishes policies for the investment and management of the Thrift Savings Fund. The

Board’s members are not full-time government employees.
372

Board/

Commissions Principal characteristics

Municipal

Securities

Rulemaking

Board

The Board is a self-regulatory organization that is subject to oversight by the Securities and Exchange Commission. It regulates dealers who deal in municipal bonds, municipal notes, and other

municipal securities. The Board consists of 15 members—5 of bank dealers, 5 of securities firms, and

5 public members not associated with any bank dealer or securities firm. Board members serve

staggered 3-year terms. The Board members elect a chairman and vice-chairman who serve one-year

terms. All Board operations are financed by fees and assessments paid by the dealer community. The

Board has broad rulemaking authority over municipal securities dealers’ activities.